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
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
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