Some Things We Learned From The GETCO 8-K
After years of secrecy, we are finally getting a peak at one of the largest players in the high frequency trading space. GETCO, having merged with Knight Capital after the $440 million Knight algo disaster, now has to file financial reports with the SEC. On August 6th, they filed a Form 8-K which shed some light on the financial health. After reading through the report, it’s quite apparent that low volume and low volatility has severely impact the profitability of one of the largest electronic market makers.
GETCO has seen its market share in U.S. cash equities decline from as high as approximately 19% in 2009 to approximately 3% for the three months ended June 30, 2013. Their market making business lost $1.9 million in the second quarter of 2013 (revenues were $118.4 million and expenses were $120.3 million). GETCO’s Execution Services business
also lost $2.9 million the second quarter.
Here are some other facts we pulled from the 8-K:
GETCO is the primary market maker for GETMatched, which is an off-exchange, dark liquidity pool for cash equities. GETMatched is an SEC-registered Alternative Trading System (“ATS”) and pays clients for some of its order flow.
The majority of GETCO’s market making revenue is derived from trading strategies that typically have very short time horizons and little overnight risk exposure.
GETCO has also begun to develop and expand its market making business to include trading strategies that are less market volume dependent. These are referred to as arbitrage and mid-frequency strategies and involve holding positions for longer periods than GETCO’s historical market making strategies.
Growth in the number of global electronic trading market participants has resulted in greater competition for order flow. At the same time, the current market environment, characterized by low levels of market volume and volatility, is reducing market making opportunities. As volume and volatility decline, the opportunity for market making firms to readily buy and sell securities declines, which increases the probability that these participants will hold positions for longer periods. Additionally, as volume and volatility decline, the spread between the bid price and ask price narrows, which inherently reduces the profit opportunity for market makers who rely on their ability to capture the spread in order to generate profits. Although the impact is difficult to quantify, the recent sustained levels of low volume and volatility across the U.S. and European equity markets in particular, have exposed GETCO and other market making firms to greater risk with lower profit potential.
For the six months ended June 30, 2013, GETCO invested $9.2 million to develop new or expand existing technologies. GETCO expects that the rate of technological change will continue at, or increase from, the historical trend, necessitating incremental technology investments in the future
Compliance with additional legislation or regulation, or changes in the interpretation of existing laws, rules, and regulations could adversely impact GETCO’s future results.
The proliferation of newly created, electronically traded products across product types, asset classes and geographies expands the potential opportunity for market participants. GETCO believes it should continue to be well positioned to capitalize on such opportunities