Knight Capital Group, the largest ETF market maker, is in talks with two separate high-frequency trading firms to sell its profitable market-making unit, though it’s possible no transaction will take place and it will continue operating as it does currently.
Virtu Financial LLC and Getco LLC will submit proposals to Knight’s directors as soon as this week, according to a report in the Wall Street Journal that cited unidentified sources familiar with the discussions. Other potential bidders for the market-making unit or other parts of Knight’s business could approach the board, the Journal report said.
A Knight official declined to respond to the report, telling IndexUniverse is an emailed response: "The company does not comment on rumor and speculation."
Just the same, the Journal report fueled a nearly 19 percent jump in the Knight Capital (NYSE: KCG). Its shares were trading at $2.95, up 46 cents from Friday's close.
The market-making unit, the most profitable of Knight’s businesses, has a leading position in the world of exchange-traded funds. ETFs have become a pocket of the trading world that now routinely makes up a third of volume by dollar value and 40 percent or more when markets turn volatile, according to a study conducted by IndexUniverse.
The prospect of a sale of the market-making unit would follow by about four months a trading fiasco on Aug. 1 caused by a software problem that wiped out its profits. The software problem caused a multitude of trade to execute automatically in minutes, instead of days or even weeks, market sources told IndexUniverse at the time.
The Journal noted that the firm had pretax profits of $663.8 million from 2009 to 2011, but that it posted a $400.9 million loss in the first nine months of the year because of the trading glitch.
The firm received a $400 million capital infusion in the wake of the crisis by selling convertible preferred stock.
The Jersey City, N.J.-based firm posted a third-quarter loss of almost $390 million.
Buyers—and sellers—beware: Trading mistakes can be costly, but they are avoidable.
Investors have fewer—but better—choices.
Sometimes what’s behind a very high dividend yield is truly surprising.
For VIX-related ETFs to work as that ‘magical’ hedge, you have to time the market. Good luck with that.