Feb 13 Profits at Getco Holding Co, the high-speed automated trading firm that is buying Knight Capital Group, dove in the first nine months of 2012 on soft equity volumes, low market volatility and increased competition.
But Getco also forecast its profit will rise, more than quadrupling in 2013 from last year's dismal showing and nearly doubling again by 2018, as it takes advantage of better technology and un-specified strategic initiatives.
Those details were disclosed in a filing Wednesday that offers a rare peek at the secretive world of proprietary trading, where large firms use their own money to buy and sell securities. The filing is part of Getco's bid to win shareholder approval for its purchase of Knight.
Net income at Getco, which is currently a private company but is going public through the $1.4 billion Knight deal, plunged 82 percent to $24.6 million in the first three quarters of 2012 compared to the same period in 2011, according to a regulatory filing made public on Wednesday.
The filing also gives some insight for Getco's motivations in buying Knight. Competition in the electronic trading market, along with an increase in internalized order flow - when brokers fill customer orders among themselves, from their own inventory, cutting out the exchanges - added to Getco's profit declines, the filing said.
Buying Knight, as Getco plans to do, could help solve that problem, because the firm is not only one of Getco's largest competitors, but is also one of the biggest internalizers of U.S. stocks.
The filing showed that Getco's profits peaked in 2008, when market volatility raged at the height of the financial crisis, and that they have been flat or falling since then as equity trading volumes declined amid the global economic downturn and tepid recovery.
Market making, or providing liquidity by offering to buy securities from, or sell securities to, institutions and broker-dealers, is by far Getco's largest business, and accounts for the vast majority of Getco's income.
But in the first nine months of this year, volatility across all the products Getco trades was at a five-year low, the filing said. Smaller price swings are correlated with lower trading volume, hurting Getco's revenue.
Revenue for the nine-month period was $425.3 million, down from $719 million in the same period in 2011, even while the firm brought its expenses down to $390.4 million for the period, from $558.1 million a year earlier.
Getco said its profit including unrealized gains on its investment in Knight's preferred stock was $91.3 million.
In forecasts provided to Knight management before the deal was struck and included in the filing, Getco said it expected net income to rise to $112 million in 2013, from $24 million in 2012, under its base case scenario.
Net income was forecast to rise to $221 million in 2018, Getco said, as long as technology improvements and strategic undertakings went as planned. If not, it said, net income in 2018 might rise only to $77 million.
Around 67.9 percent of Getco's trading revenues were derived from equities, 21.4 percent from fixed income and 10.7 percent from commodities and foreign exchange.
Getco agreed to buy Knight in December, after the firm had to be rescued over the summer by Getco and other investors. It suffered a trading loss of $461.1 million in August due to a software glitch that unleashed a flood of orders to the New York Stock Exchange.