NEW YORK Citadel LLC, Virtu Financial, Two Sigma and RGM Advisors are among the companies bidding for E*Trade Financial Corp's (ETFC.O) market-making unit in a deal expected to be worth $100 million to $200 million, several sources with direct knowledge of the situation said on Wednesday.
E*Trade said last month that it was selling its Chicago-based market-making business, G1 Execution Services. The New York-based brokerage said it was taking a $142.4 million impairment charge to close the unit, which it planned to sell within six months.
An E*Trade spokesman declined to comment.
Citigroup (C.N) is overseeing the sale, two of the sources said. Citigroup, Citadel and RGM declined to comment. Spokespeople at Virtu and Two Sigma were not immediately available to comment.
There is at least one other bidder, which is a bank that does not currently offer market-making services, according to one of the sources, who was not permitted to speak to the media and wished to remain anonymous.
Citadel, a hedge fund which had been E*Trade's largest shareholder until it sold its 9.6 percent stake in March, is considered a frontrunner in the bidding. It competes directly with G1 in market making.
For E*Trade, shedding the market-making operation is part of an effort to refocus on its core brokerage business, new Chief Executive Paul Idzik told investors last month. Idzik is the company's seventh CEO since 2007.
Market makers provide liquidity to markets by buying and selling stocks or other financial products using their own capital to ensure orderly activity, and aim to profit off the spread between the bid and the offer. It has become increasingly difficult over the past few years for firms to make money from market making, as tighter spreads and low trading volumes have squeezed margins.
But banks, which already have the people and technology to operate market-making businesses, recognize that they are in a good position to enter this market, said Adam Sussman, a partner at TABB Group, a market and research advisory company.
"It's not so much that they see some incredible reversal of fortunes for equity markets, but rather they have a lot of the assets required to be in this business but what they are missing is the order flow itself," Sussman said. "They want the customer relationships that come with the flow."
E*Trade came under scrutiny earlier this year when it disclosed that there had been some questions about whether its customers' trades being sent to G1 were being executed at the best possible price.
The Financial Industry Regulatory Authority is investigating the order handling issue, which was first identified by Ken Griffin, the founder and chief executive of Citadel. Griffin was a director on E*Trade's board at the time.
Virtu, which is backed by private equity firm Silver Lake Partners, had made an all-cash bid of $3.20 a share for Knight Capital Group last December, but lost out on that deal to rival trading firm Getco, which is now called KCG Holdings (KCG.N).
(Reporting by Jessica Toonkel and John McCrank; Editing by Steve Orlofsky and Leslie Adler)