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Virtu offers US$1.3b for KCG to create trading leader

[LONDON] Virtu Financial Inc offered to buy KCG Holdings Inc for as much as US$1.3 billion, amid signs the high-speed trading industry is finding it harder to make money.

Virtu's board is working with advisers to review the US$18.50 to US$20 a share cash proposal, KCG said Wednesday. KCG is a major player in arenas that Virtu hasn't entered, including executing individual investors' stock trades for brokerages such as E*Trade Financial Corp and TD Ameritrade Holding Corp.  The takeover bid comes as algorithmic trading revenue in the biggest markets has fallen. US stock-market makers made $1.1 billion of revenue last year, compared with US$7.2 billion in 2009, according to estimates from Tabb Group LLC. At the same time, the cost of doing business has increased, whether through high-speed networks or market-data feeds from stock exchanges.

"These sort of takeovers, mergers are inevitable as cost pressure mounts and margins compress for these market makers," said Niki Beattie, a Merrill Lynch alumna who now heads adviser Market Structure Partners. "At least taking out one of the bigger firms might reduce competition and help sustain a slightly higher margin. They'd have high infrastructure costs so that would also help to share those costs." Andrew Smith, a spokesman for Virtu, declined to comment.

Other leading trading firms could seek acquisitions. Flow Traders BV, a Dutch market maker that went public in 2015, has said it may issue shares for such purchases. Virtu was interested in buying KCG's predecessor firm Knight Capital Group Inc in 2012.

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"Less demand and more supply of market making services reduced profit opportunities" for high-frequency traders in recent years, Credit Suisse Group AG analyst Ana Avramovic wrote in a report dated March 15. "Meanwhile, costs continued to mount as a technological arms race forced firms to continually shell out for the latest and fasted equipment." KCG was formed when high-frequency trader Getco LLC combined with the ailing Knight after a mishap with one of Knight's trading algorithms cost the firm US$440 million in 30 minutes. 

There were signs Knight and Getco struggled to combine their corporate cultures. That might happen again, Ms Beattie said.

"The cultures might not work together," Ms Beattie said. "These companies have grown very fast, often with one or two dominant shareholders and it takes time for them to find their own culture or at least one that works as the company grows before then trying to integrate with another firm." Virtu's shares have lost almost a quarter of their value since the company's initial public offering in April 2015. The firm has been searching for ways to branch out, and last year struck a deal to trade on behalf of asset managers such as T. Rowe Price Group Inc. It also entered a three-year agreement with JPMorgan Chase & Co. to help the bank access and trade in the US Treasury market. These businesses, while still new, haven't been enough to influence the company's bottom line.