Virtu Financial holds firm over bid for KCG Holdings

Virtu Financial has decided not to increase its offer to buy rival high-frequency trading group KCG Holdings after concluding its due diligence process on Monday, according to people briefed on the conversations.

Virtu’s initial, unsolicited proposal of between $18.50 and $20 per share, which could value KCG at more than $1.3bn, became public on March 15. It initially received pushback from KCG board members and Virtu has since been conducting a due diligence process into the company, where it has been given access to non-public information to inform an offer price.

That process ended on Monday and Virtu has re-submitted its bid, choosing not to raise its offer above the original range at this time.

Following Virtu’s offer being made public, KCG received inquiries from other companies, prompting the board to ask financial adviser Goldman Sachs to open up the bidding process. But after Goldman reached out to other groups, only Virtu remains in active discussion with the company, according to the people.

The offer represents a 31 per cent premium to KCG’s closing stock price on March 14 — the day before the offer — but remains below the company’s book value per share of $20.20, according to data from Bloomberg.

KCG, Virtu and Goldman Sachs declined to comment. KCG is expected to report first-quarter earnings on April 20.

Persistently low volatility since the financial crisis has hurt the traditional model of high-frequency trading groups that make money by extracting small differences in the price to buy and the price to sell assets, with both KCG and Virtu suffering from shrinking revenues.

In contrast, periods of heightened volatility, such as that in August 2015 after fears over the Chinese economy hit markets, have resulted in higher profits for the companies. Virtu reported a 34 per cent increase in adjusted net trading income in the third quarter of 2015.

High-frequency trading groups are also struggling as the profitability of speed dwindles. An arms race to become increasingly faster has resulted in high data and infrastructure costs, weighing on margins, with industry participants saying speed alone is no longer enough to succeed.

Teza Technologies, a pioneer of electronic markets, recently sold its trading business to Quantlab Financial and had earlier sold assets, including microwave towers, to Virtu.

KCG’s stock shot up 23 per cent to $16.90 as reports of Virtu’s bid emerged, reaching a peak of $18.57 in subsequent days before falling back and trading at $17.59 on Monday. Virtu’s stock price has fallen 7.7 per cent to $15.55 since it’s closing price preceding the announcement.