Persistently low trading volume and volatility provide fertile ground for mergers and acquisitions in the electronic market-making space.
That’s according to Doug Cifu, chief executive officer of Virtu Financial, which in April said it would buy speed-trading rival KCG for $1.4 billion.
Speaking Wednesday at the Sandler O’Neill Global Exchange and Brokerage Conference, Cifu declined to address Virtu’s M&A plans other than saying any deal would need to add to earnings and make strategic sense. But broadly speaking, market conditions are making for a healthy universe of willing sellers, in both the proprietary-trading and agency-brokerage businesses.
“When volume and volatility becomes low, it’s almost impossible to grow,” especially if a firm’s focus is on U.S. equities, Cifu said. In this situation, “you can buckle up, ride out the storm and hope for more volatility, or you can throw in the towel.”
The Chicago Board Options Exchange Volatility Index (VIX) closed at 10.38 today, at the bottom end of its 52-week range of 9.56-26.72. U.S. equity trading volume has been running about 6.5 billion to 7 billion shares per day, well below the 10 billion to 12 billion range that would be considered robust.
As a prospective buyer, Cifu noted Virtu has the advantage of being public traded. “It helps when you have a marketable security,” he said.
A privately owned company would have questions about financing a sizable buyout like KCG. “How am I going to finance this? There’s only so much leverage you can put in. You need the fluidity of having a currency” in the form of public shares, Cifu said.
KCG was a “no-brainer” of an acquisition for Virtu given the strategic and synergistic considerations of the deal, Cifu said. Some synergies, such as headcount reduction, are already underway before the deal is meant to close in the third quarter.
“At end of day, Virtu is about scale,” Cifu said. “KCG has struggled with integrating Knight and Getco. The idea is to bring our efficiency to an organization that doesn’t need to be as large as it is, but has an unbelievable customer franchise, and make their trading better.”
