KCG Exits NYSE Designated Market Making with Sale to Citadel Securities

Citadel Securities is set to become the largest designated market maker on the NYSE as they are acquiring the exchange

With electronic market making decreasing the role of human intervention at the New York Stock Exchange (NYSE), many long time market maker companies have been contracting their businesses on the exchange.

Operating as designated market makers (DMM), these traders replaced exchange ‘specialists’ which would supervise the ordered trading and liquidity of specific stocks. Similar to specialists, DMMs monitor trading in shares of specific companies and are obligated to price shares according to the national best bid or offer as needed to supply liquidity to shares. Unlike specialists, DMMs aren’t privy to identification of orders before they are executed.

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Among the banks exiting DMM businesses are Goldman Sachs and Barclays. Adding to that list is KCG, whose current DMM operations were the result of the Getco and Knight Capital merger in 2013. It is selling the unit to Citadel Securities.

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The sale by KCG occurs as during their Q4 2015 post-earnings report conference call, KCG CEO Daniel Coleman was asked about the DMM unit’s future as other companies had exited. Coleman’s answer last month appeared to hint that they were ready to sell the business as well, as he stated: “With all of our business, we review them. I think the DMM business is a business that has provided value for us in the past. The only thing I would say, it’s not a big business for us. And with all of our businesses, we have been reviewing them.”

Like Barclays and Goldman Sachs which sold their DMM operations to GTS and IMC Financial Markets, KCG’s sale to Citadel represents another acquisition of exchange based market making by a high frequency trading (HFT) firm. In addition to those names, Virtu Financial, another HFT market maker has one of the largest DMM operations on the NYSE.

With the acquisition from KCG, Citadel is set to become the largest DMM operator on the NYSE with around 1500 share issues. For HFT firms, the benefit of a presence on the NYSE is direct access to companies and traders as well as lower trading fees and higher execution rebates. With regard to physical presence, it can also be used to help forge ongoing liquidity relationships as well as allow them to better understand market participant needs and changing trader habits.

Expected to close in Q2 2016, terms of the deal have yet to be disclosed by either deal.

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