Getco, a leading high-frequency trading firm, revealed that its revenues and earnings have slid almost uninterruptedly since the financial crisis, according to disclosures made public on Wednesday.
Getco, which is privately held, released its financial results for the first time as part of its impending purchase of Knight Capital Group, the trading firm that suffered a debilitating trading glitch last August. Getco, a 14-year old Chicago-based company, won a bidding war for Knight in December, ultimately offering a combination of cash and shares that values Knight at around $1.4 billion.
The filings provide the first look into what is likely the most powerful company in a highly secretive industry.
As was expected, Getco has struggled as trading activity has withered in many financial markets over the last few years, but the magntude of the declines was striking. The firm’s profits in the first nine months of last year fell 82 percent from a year earlier to $25 million, while the firm’s trading revenues were down 43 percent to $414 million in that same period. That was a much sharper drop than the decline in trading volume on the markets where Getco makes most of its money.
Getco’s struggles illustrate the larger challenges facing computerized trading companies. While these high-speed firms have come to dominate the trading world - accounting for over half of all stock trading - since 2008 they have encountered sliding trading volumes and less extreme short-term swings in the price of financial assets.
While Getco’s overall expenses have fallen in recent years, the costs of keeping computers close to the big exchanges, and maintaining high-speed data streams, were more than three times higher in the first nine months of last year than they were for all of 2008. The firm’s head count more than doubled ov! er the same period, to 409 from 189. Meanwhile, the trading revenues in the first nine months of 2012 were barely a third of what they were in all of 2008.
Getco notes in the filing that some competitors are “currently making decisions about their long-term ability to compete across asset classes and product types,†leading some of them to close or scale back. Getco will become a publicly traded company through its merger with Knight. Together, they will become one of the largest players in trading of American stocks.
Knight recently announced that its profits in the fourth quarter of 2012 were $6.5 million, down 84 percent from a year earlier, in part because of costs related to its Aug. 1 programming troubles that flooded the market with errant trades. The issue ultimately led to losses of $458 million for the firm. Knight’s revenue in the fourth quarter was down 16 percent, to $288 million.
Getco was among several firms that helped keep Knight alive the weekend after the trading ebacle. Within a few months, Getco made its push to purchase Knight outright and eventually outbid another high speed trading firm, Virtu.
Getco makes a majority of its money trading American stocks, using sophisticated computer algorithms to dart in and out of trading positions, taking advantage of small moves in the prices of stocks and rebates offered by exchanges. The company has been expanding in other American financial markets, such as options and futures, and in stock markets elsewhere in the world, but those markets have generally seen slower trading as well.
Getco has also made a push to expand its business trading on behalf of clients. But for most of last year it still made 94 percent of its revenue from trading with its own money.
The filing on Wednesday was part of the process of winning shareholder backing for the merger. The deal still requires the approval of its shareholders and regulators, but the companies expect to close the purchase in the second quarter of thi! s year.
Knight was attractive to Getco in part because it has a reliable business buying and selling the shares of small retail investors, who are easier to make money trading against than large institutional investors. The companies appear to have their best hope for future growth in changes to the financial markets being instigated by financial reform legislation in the United States and Europe. Wednesday’s filing notes that legislation is likely to push more trading of bonds and derivatives onto electronic platforms where Knight and Getco can participate.
Getco also said in the filings that it is in position to take advantage of the broader challenges facing the high-speed trading industry and predicted that its earnings will rise sharply this year.
“Getco believes that it stands to benefit from this period of rationalization and consolidation as it is positioned to potentially capture a greater share of activity if and when market volumes and volatilities increase,†the filing said.
