The companies have said the deal will make trading easier and cheaper for investors. But given that one of the firms nearly collapsed in a trading blunder in August, some traders and former regulators were worried about the potential concentration of so much buying and selling in one company.
The Knight Capital Group, which lost $460 million after the Aug. 1 computer misstep, agreed on Tuesday night to be sold to Getco, a privately held Chicago-based firm that has been one of the leaders in the high-frequency trading industry.
The deal values Knight at $1.4 billion, which Getco will pay in a combination of cash and shares.
On its own, Knight has said that it is responsible for from 10 percent to 15 percent of all trading in American stocks.
Getco has kept its size and market share a carefully guarded secret, but industry analysts suggested that it frequently does as much stock trading as Knight across all venues, including public exchanges and opaque private trading platforms. If the new company manages to maintain all of that trading activity, the combined company could be larger than any other participant in the stock market and involved in more trades each day than the nation’s largest stock exchange, Nasdaq, said Larry Tabb, founder of the data firm the Tabb Group.
Knight and Getco are also significant players in trading of futures, options and currencies, among other markets.
“The two 800-pound gorillas are getting together, and they will be a 1,600-pound gorilla,” said James J. Angel, a professor at Georgetown University who specializes in market structure and regulation.
The chief executive of Getco, Daniel Coleman, said in a statement that “the combination of Knight and Getco will create a powerful, dynamic firm with an unmatched ability to deliver results for clients.”
The merger still has to win the approval of shareholders and the Financial Industry Regulatory Authority. Even if the two firms do keep up their current level of trading, lawyers said that the size of the two companies is probably not large enough to create antitrust concerns.
But Annette Nazareth, a former commissioner at the Securities and Exchange Commission, said that given the recent disruptions that have hit the stock markets — including Knight’s breakdown — the size of the company is “something you have to think about in this deal.”
“It is a factor if you have a very large player that could have an impact on the market if it had a problem,” said Ms. Nazareth.
After Knight’s computer problems triggered runaway trading in more than 100 stocks, the firm withdrew from trading for the rest of the day. In corners of the market where Knight was particularly dominant, such as trading of exchange-traded funds, Knight’s disappearance from the market made trading more expensive for other investors, according to data from Index Universe, a firm that tracks E.T.F.’s. Knight nearly went out of business before a rescue effort organized partly by Getco came to its aid.
Joel Hasbrouck, a professor at New York University who has advised exchanges and trading firms, said that the size of the new company worried him because it could give the company too much influence with regulators, as has happened when companies have grown large in other corners of the financial markets.
“Sometimes,” Mr. Hasbrouck said, “just by virtue of sheer size, an organization can have a bit more weight with regulators.” Lawmakers have recently been looking at whether high-speed firms have gained too much of an edge over ordinary investors and if they should face new fees and trading restrictions like those introduced in other countries.
Getco and Knight currently have about 2,000 employees, which is much smaller than the major Wall Street firms. But their dominance in the trading world is evident not just in the total number of shares they buy and sell each day.
On the floor of the New York Stock Exchange, Getco is the so-called designated market maker, agreeing to be a middleman in certain stocks to keep the buying and selling orderly and fair, for 909 of the exchange’s 3,259 stocks. Knight plays the same role for 513 stocks. Together, they would be in charge of 20 percent more stocks on the exchange than their closest competitor, Barclays.
Article source: http://www.nytimes.com/2012/12/20/business/knight-capital-announces-sale-to-getco.html?partner=rss&emc=rss