KCG Holdings Results Easily Top Expectations
KCG Posts $35.7 Million Profit, Helped By Higher Revenue From Trading Operations
By Timothy W. Martin And Bradley Hope
Updated May 2, 2014 3:57 p.m. ET
KCG Holdings Inc. KCG +5.04% —formed last year when high-frequency trading firm Getco Holding Co. bought Knight Capital Group—posted first-quarter profit that topped analyst forecasts, and executives spent much of their earnings conference call stressing the fairness of U.S. markets.
The high-frequency trading business has been on the defensive over the past month, after a new book, "Flash Boys," by Michael Lewis, alleged that exchanges, banks and high-frequency traders had "rigged" the markets. State and federal investigators have launched investigations.
High-frequency traders use powerful computers to zip in and out of markets, earning tiny profits on hundreds of thousands of transactions a day.
KCG, based in Jersey City, N.J., saw its share price hobbled over the past month, down about 14% since the book was published on April 1.
Friday brought some welcome news to shareholders, as KCG's first-quarter earnings of $35.7 million, or 30 cents a share, were nearly double Wall Street forecasts. Revenue came in at $383.7 million. Analysts surveyed by Thomson Reuters projected earnings of 17 cents a share and revenue of $342 million.
In Friday afternoon trading, KCG shares were up 4.4% at $10.76, easing from an earlier session peak of $11.41, struck at the open.
The strong results at KCG were driven by tighter expense controls, a bounce back in trading volumes and successful direct-to-client market making.
During the call, KCG Chief Executive Daniel Coleman said the company is providing U.S. securities regulators information. While it remains unclear how trading may change, Mr. Coleman said, "the fundamental role we play in the markets will not."
The Securities Exchange Commission said this week it is examining whether traders using rapid-fire trading have an unfair advantage. That review includes firms such as KCG that execute ultrafast trades on behalf of retail and institutional investors.
SEC Chairman Mary Jo White testified before a House committee on Tuesday, but stopped short of saying the world of high-speed trading has created an unlevel playing field in the markets.
Mr. Coleman, who previously led Getco, said the intermediary role his firm provides among buyers and sellers has existed for hundreds of years.
"Little changes can have big impacts," Mr. Coleman said. He prefers "little changes here and there," he said, because the system powering the U.S. equity market is "a very delicate ecosystem."
Mr. Coleman identified several areas he felt should go under review, such as fee structures, market-maker obligations and certain disclosures to alternative trading systems, such as the dark pools.
"No market is perfect," Mr. Coleman said. "I imagine the SEC is going to be very deliberate as they make changes and see how they impact the markets."
As for KCG's first quarter, Niamh Alexander, an analyst with Keefe, Bruyette & Woods, said, "Trading revenue drove the entire revenue beat."
The revenue that KCG takes in for each dollar traded—a measure called "revenue capture"—also swelled to 1.26 basis points per dollar, up from 0.98 in the previous quarter. A basis point is 1/100 of a percent.
Trading revenue in the first quarter rose 21% to $258.3 million from the fourth quarter.
A year ago, KCG reported first-quarter earnings of $22.3 million, or 6 cents a share. Revenue was $199.6 million. KCG now has about one-third of the diluted shares outstanding compared with the first quarter of 2013.
Getco, which was based in Chicago, acquired Knight Capital Group Inc. in July 2013 for $1.4 billion. The deal came after Knight lost $461 million because of a trading error in 2012.
Results from before the third quarter of last year reflect only the results of Getco before the merger with Knight Capital.
The company said it made $50 million in principal prepayments on a $535 million loan during the quarter, repaying it in full.
As of March 31, KCG had about $651.1 million in cash and cash equivalents, and its total outstanding debt was about $472.3 million. KCG also said Friday it had authorized a $150 million stock-buyback program.