(Bloomberg) — KCG Holdings Inc., the trading firm formed in the aftermath of Knight Capital Group Inc.s near collapse, is having a September to forget.
Its stock has plunged 14 percent, worse than the Standard & Poors 500 Indexs 1.8 percent slump, and at one point fell eight straight days, tying the record for its longest slump. At least five senior managers have left in September as KCG fired 4 percent of about 1,200 workers.
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Equity losses are mounting as Chief Executive Officer Daniel Coleman tries to integrate high-frequency trader Getco LLC with broker-dealer Knight Capital. Coleman, who worked at Getco, sees KCG as a general securities firm providing execution services, market making and trading platforms for clients.
Things are going well, but I think theyre not going without a problem here or there, Coleman said in a phone interview this week. Were putting two firms together, two firms of not quite the same size and arguably different cultures. And doing that is difficult. It takes time.
Steve Bisgay became the most senior executive to leave when he stepped down as chief financial officer on Sept. 12. Marshall Nicholson, who co-ran the firms BondPoint debt market, and John Miesner, the head of sales for the Hotspot currency platform, have also gone, according to Sophie Sohn, a KCG spokeswoman.
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Nicholsons co-chief, Bill Vulpis, is now solely in charge of BondPoint, Sohn said. Other departures include Corporate Strategy Chief Richard Herr and Deputy General Counsel Andrew Greenstein.
Difficult Environment
In this market environment, we have to be as efficient as possible in deploying our resources, KCG said in a statement e-mailed to Bloomberg News, regarding the 4 percent reduction in its workforce. While difficult, these decisions move us closer to building a scalable and agile firm that will be responsive to our clients and shareholders expectations even during the most difficult market conditions.
Knight Capital needed a suitor after bombarding U.S. exchanges with erroneous orders on Aug. 1, 2012, losing more than $450 million in the process. Chicago-based Getco agreed to the merger at a time when dwindling equity volume was pressuring its own business, prompting a 90 percent drop in 2012 net income.
Since the companies completed the merger in mid-2013, KCGs stock price has dropped 3.8 percent, lagging behind the S&P 500s 26 percent rally.
Dwindling Volume
Profits at securities firms have suffered as U.S. stock trading has dwindled during the five-year bull market. Liquidnet Holdings Inc., which runs a trading platform where large investors can buy and sell stocks, is cutting about 6 percent of its staff amid poor performance at its U.S. division, Bloomberg News reported this week.
KCGs performance was lampooned in an anonymous letter purportedly from disgruntled employees cited earlier this month in a story by the Wall Street Journal. Employees are close to open rebellion, according to the letter mentioned by the newspaper.
The problem a lot of people have with our business model is its a little different from a lot of businesses out there, said Coleman, who previously worked at UBS AG. I felt like there was a different business model — especially post Dodd- Frank and Volcker — that would be a lot leaner and a lot more effective. The Dodd-Frank Act, a U.S. law that took effect in 2010, revamped market regulation in the U.S. Part of it, known as the Volcker rule, banned banks from engaging in speculative trading.
Lewiss Book
KCGs stock fell 17 percent in April after Michael Lewis published Flash Boys, in which he claimed that high- frequency traders rig the equity market against other investors. The shares rebounded 21 percent in May. They have still slumped 16 percent this year, while financial companies in the S&P 500 have gained 5.6 percent.
The merged firm has failed to win the backing of most Wall Street analysts, with five of the eight who cover the company rating the stock as a hold.
Negatively, the workforce reductions are a function of the environment, which remains challenged for market makers like KCG, Christopher Harris, an analyst at Wells Fargo Securities LLC, wrote in a research report published on Sept. 23. Positively, the lower staff size should result in less compensation expense going forward.
When Getco and Knight Capital closed their merger on July 1, the firms joint headcount was about 1,600 people, Coleman said. After shedding units and making cuts, it will soon be about 1,100.
Its a significant headcount reduction over two years, he said, adding that the firm has hired about 170 staff since the merger. I feel like were staffed at the right level for the businesses we have.
KCG announced a new trading venue called HotSpot QT for currencies this week. The platform will not disclose prices to the market before or after transactions are placed.
This is a transitional period for our firm, I think thats pretty clear, Coleman said. I think in a year were going to look back and see Q3 as a real turning point for us.
