As you’re probably aware, GETCO – one of the world’s largest high frequency trading (HFT) prop shops, is buying Knight Capital. This came about after Knight nearly collapsed when a technical glitch on Aug. 1, 2012, caused the firm to lose $440 million. While the acquisition is clearly opportunistic, since Knight was so crippled after its August losses, the move also signals GETCO’s lack of confidence in the long-term profitability of the HFT model, particularly in equities.
Sharply Declining Profits in HFT
GETCO and Knight are two of the largest market makers on the New York Stock Exchange. Apparently, however, GETCO’s decision to purchase Knight is based partly on sharply declining profits in high-frequency trading, which is driving a decision to diversify away from pure prop trading. Knight is a market maker with substantial retail flow. They get huge equities flow from retail brokerages such as Fidelity, E*Trade and TD Ameritrade. According to Traders Magazine, Knight makes markets in some 19,000 U.S. equities, handling 3 billion shares a day.