KCG Holdings, Inc. (NYSE: KCG) has reported a consolidated loss of $11.2 million, or $0.13 per share, for the third quarter of 2016. The third quarter consolidated loss includes an income tax benefit of approximately $6.1 million or $0.07 per share primarily related to tax deductions and credits generated from the company’s software development activities.
|Select Financial Results||($ in thousands, except EPS)|
|Trading revenues, net||113,829||186,882||277,677|
|Commissions and fees||87,842||94,961||95,027|
|Pre-tax (loss) earnings||(27,974)||54,565||35,419|
Third Quarter Highlights
- Averaged approximately 30 percent market share of retail SEC Rule 605 U.S. equity share volume among the leading market makers during the quarter
- Averaged approximately 16 percent market share of U.S. ETF share volume from market making and agency-based trading activity during the quarter
- Completed the migration of KCG MatchIt to a new matching engine
- Acquired Neonet Securities AB, an independent agency broker and execution specialist based in Stockholm, Sweden
- Named Mike Blum Chief Technology Officer effective October 1, 2016
Daniel Coleman, Chief Executive Officer of KCG, said:
Market activity quickly died down after a brief post-Brexit flurry to close the second quarter and remained subdued throughout July and August with cautious trading and realized volatility near all-time lows. Despite a modest pickup in September, the trading environment proved challenging for our quantitative trading models. Although KCG’s financial results for the quarter were disappointing, we nonetheless posted strong market share in core segments of the market. In addition, we completed the acquisition of Neonet, which expands KCG’s agency-based electronic trading in Europe ahead of anticipated opportunities from regulatory changes with the implementation of MiFID II.
The Market Making segment encompasses direct-to-client and non-client, exchange-based market making across multiple asset classes and is an active participant in all major cash, options and futures markets in the U.S., Europe and Asia. During the third quarter of 2016, the segment generated total revenues of $136.1 million and a pre-tax loss of $13.8 million.
In the third quarter of 2016, market volumes, realized volatility and bid-ask spreads in U.S. equities contracted due in part to the uncertain outlook. During the quarter, consolidated U.S. equity dollar volume declined 15 percent year over year. Amid intensified competition for retail order flow, KCG Market Making grew market share of retail U.S. equity share volume to approximately 30 percent. Market volumes outside U.S. equities were generally flat to down year over year, led by declines in European equities and currencies.
Mr. Coleman shared:
The unusually low volatility and generally poor market conditions combined with renewed competition for retail order flow negatively impacted the contribution from U.S. equities for the quarter. KCG market making underperformed as reflected in the average revenue capture per U.S. equity dollar value traded for the quarter. Market making outside U.S. equities faced similarly difficult conditions. As we build scale in select asset classes and regions, and market conditions generally improve, we expect contributions outside U.S. equities to become more significant to the segment revenues.”
In the second quarter of 2016, the segment generated total revenues of $211.8 million and pre-tax income of $40.5 million.
In the third quarter of 2015, the segment generated total revenues of $299.8 million and pre-tax income of $85.4 million, which includes expenses related to asset writedowns of $4.4 million.
Global Execution Services
The Global Execution Services segment comprises agency execution services and trading venues. During the third quarter of 2016, the segment generated total revenues of $63.7 million and a pre-tax loss of $0.4 million.
In the third quarter of 2016, institutional trading activity was predominantly defensive given the historic market valuations, negative outlook for corporate earnings and potential for disruptive market events. Outflows from U.S. equity mutual funds increased for the second straight quarter and redemption pressures on U.S. equity hedge funds continued from the first half of the year. Amid a 10 percent decline in consolidated U.S. equity share volume for the quarter compared to a year ago, KCG Algorithmic Trading grew U.S. equity share volume from the 25 largest U.S. asset managers by five percent. KCG BondPoint grew fixed income par value traded more than 50 percent year over year.
Mr. Coleman commented:
The results for agency trading during the quarter generally follow the declines in market volumes of U.S. equities and ETFs. Nonetheless, KCG Algorithmic Trading and KCG BondPoint made further inroads with the leading asset managers and retail brokers, respectively. As firms elevate best execution as a fiduciary in trading decisions, I believe we will become an even more important service provider to our clients.”
In the second quarter of 2016, the segment generated total revenues of $68.1 million and pre-tax income of $1.7 million.
In the third quarter of 2015, the segment generated total revenues of $69.7 million and a pre-tax loss of $1.1 million.
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