Virtu Financial is closing the London proprietary trading businesses of KCG Holdings following its $1.4bn takeover of its rival, but will retain a team in the City to build more customer business.
The New York group confirmed it was committed to keeping an operation in the UK capital but said it would run two businesses in Europe as part of the restructuring of KCG, which it began when the deal closed last month. The decision is not related to Brexit.
The purchase of KCG turned Virtu into one of the biggest participants in the US equity market with about one trade in five. Part of its logic was savings at a time when the industry has been under pressure from rising costs and low profitability.
Virtu’s market-making business will continue to be based in Dublin while London will house KCG’s more client-facing business, ending rumours that the UK office may close.
“The foundation of KCG’s European business is a great client franchise coupled with the upside potential that Mifid II will bring,” Joe Molluso, Virtu’s chief financial officer told the FT, referencing the European markets legislation that will toughen rules around ensuring customers get the best available price for a deal. “However, the numbers [at KCG] just did not add up.”
He said the European businesses was running with annual losses of about $30-$40m.
“We are on schedule to shut down the unprofitable prop trading businesses that were largely duplicative of Virtu’s while focusing the business on delivering better products to clients by combining Virtu’s technology and trading acumen with the existing franchise,” he said.
In the US KCG is best known for trading equities for large institutions, especially the orders collected from retail customers. In Europe, where retail investors are a smaller presence in the market, KCG targeted business that had been outsourced by local banks struggling with rising compliance and IT costs.
But the subdued volatility across financial markets hurt profits and it was unable to persuade enough customers to use its systems. Revenues at KCG’s international business, which was in large part its European unit, fell from £189m in 2014 to $103m in 2016, and it accrued losses of about $30m.
Virtu declined to comment on headcount. Analysts are expected to press the company for details on lay-offs next week when it reports its first set of results since the deal closed. KCG employed more than 900 people globally, more than six times as many as Virtu.
But many of KCG senior executives have left in recent weeks, such as Philip Allison, head of KCG Europe, and Rob Crane, head of European client execution. Before the Virtu deal closed, KCG closed its Singapore business.
Separately, the group has received interest in KCG’s Bondpoint trading platform, which could fetch $400m, people with knowledge of situation said.