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| 8-K - 8-K - Virtu KCG Holdings LLC | d694808d8k.htm |
| EX-99.2 - EX-99.2 - Virtu KCG Holdings LLC | d694808dex992.htm |
 KCG Holdings, Inc. (NYSE: KCG)
Wells Fargo Asset Managers, Brokers & Exchanges Conference
March 19, 2014
Exhibit 99.1 |
 Safe Harbor
Certain statements contained herein may constitute "forward-looking
statements" within the meaning of the safe harbor provisions of the U.S.
Private Securities Litigation Reform Act of 1995. Forward-looking statements
are typically identified by words such as "believe," "expect,"
"anticipate," "intend," "target," "estimate,"
"continue," "positions," "prospects" or "potential," by future conditional verbs such as "will,"
"would," "should," "could" or "may," or by
variations of such words or by similar expressions. These "forward-looking statements" are not
historical facts and are based on current expectations, estimates and projections
about KCG's industry, management’s beliefs and certain assumptions
made by management, many of which, by their nature, are inherently uncertain and beyond our control. Any forward-looking
statement contained herein speaks only as of the date on which it is made.
Accordingly, readers are cautioned that any such forward-looking
statements are not guarantees of future performance and are subject to certain
risks, uncertainties and assumptions that are difficult to predict
including, without limitation, risks associated with: (i) the strategic business
combination (the “Mergers”) of Knight Capital Group, Inc.
("Knight") and GETCO Holding Company, LLC ("GETCO"), including,
among other things, (a) difficulties and delays in integrating the Knight
and GETCO businesses or fully realizing cost savings and other benefits, (b) the
inability to sustain revenue and earnings growth, and (c) customer and
client reactions to the Mergers; (ii) the August 1, 2012 technology issue that resulted in Knight's broker-dealer subsidiary sending
numerous erroneous orders in NYSE-listed and NYSE Arca securities into the
market and the impact to Knight's capital structure and business as well
as actions taken in response thereto and consequences thereof; (iii) the costs and risks associated with the sale of Knight's institutional
fixed income sales and trading business, the sale of KCG's reverse mortgage
origination and securitization business and the departure of the managers
of KCG's listed derivatives group; (iv) changes in market structure, legislative, regulatory or financial reporting rules; (v) past or
future changes to organizational structure and management; (vi) KCG's ability to
develop competitive new products and services in a timely manner and the
acceptance of such products and services by KCG's customers and potential customers; (vii) KCG's ability to keep up with
technological changes; (viii) KCG's ability to effectively identify and manage
market risk, operational and technology risk, legal risk, liquidity risk,
reputational risk, counterparty and credit risk, international risk, regulatory risk, and compliance risk; (ix) the cost and other effects of
material contingencies, including litigation contingencies, and any adverse
judicial, administrative or arbitral rulings or proceedings; and (x) the
effects of increased competition and KCG's ability to maintain and expand market share. The list above is not exhaustive. Readers should
carefully review the risks and uncertainties disclosed in KCG's reports with the
SEC, including, without limitation, those detailed under “Risk
Factors" in KCG’s Annual Report on Form 10-K for the year-ended
December 31, 2013, and in other reports or documents KCG files with, or
furnishes to, the SEC from time to time.
For additional disclosures, please see
https://www.kcg.com/legal/global-disclosures. |
 About KCG
KCG helps retail and institutional investors efficiently deploy capital in the
secondary market.
1
An independent, pure-play trading firm created in mid-2013 through
the merger of leading market makers GETCO and Knight
Core capabilities in market making, agency execution and trading
venues
An active participant on global cash, futures and options markets across
equities, fixed income, foreign currencies and commodities
A focus on delivering best executions for clients and providing best prices on
public and private markets |
 Investment Rationale
1.
A better model for the emerging competitive landscape
2.
A market leader in U.S. equities and developer of advanced technologies
driving the shift in trading from analog to digital across asset
classes
3.
Merger-
and integration-related synergies still to be realized plus additional
savings from debt reduction
4.
Prospects for multiyear organic growth directly from core capabilities
5.
Additional anticipated opportunities within core capabilities from the
implementation of regulations instituted in response to the global financial
crisis of 2008
2 |
 A
Better Model Trading
Venues
Agency
Execution
Market
Making
A non-bank execution-only trading firm
A broad client network of brokers, institutions and
banks
Complementary core capabilities across market
making, agency execution and trading venues allow
for the sharing of intellectual capital, trading
technologies and support costs
Agile, scalable and well capitalized
Well positioned for a coming period of industry
transformation driven by competition, technology
and further regulation
–
Greater adoption of electronic trading to enhance price
discovery, liquidity, spreads and trading costs
–
Implementation of rules designed to minimize risks by
increasing the accessibility and transparency of certain
securities markets and use of clearing corporations
Direct-to-client market making
and proprietary trading
Agency-based algorithms,
execution management
system (EMS) and equity
sales traders
FX electronic communications network
(ECN), fixed income ECN and alternative
trading systems (ATSs)
3 |
 KCG is a market leader in U.S. equities, the most
accessible, competitive, technologically-advanced
and liquid segment of the global securities markets.
KCG participates in the market in three ways:
KCG’s technologies drive enhancements in terms of the
client offering, market coverage, available liquidity,
execution quality, anonymity, trading costs and service.
A Technology-Driven Leader in U.S. Equities
4
3.9%
5.5%
0
15
30
45
60
75
2013
KCG ADV and market share
of dark pool volume
GETMatched (ATS)
Knight Match (ATS)
30.1%
0
100
200
300
400
500
600
700
800
900
2013
KCG market making ADV and market share
of retail U.S. equity volume
Total SEC Rule 605-eligible U.S. equity volume
KCG market making SEC Rule 605-eligible U.S. equity volume
-4.2%
18.8%
-10%
-5%
0%
5%
10%
15%
20%
Year-over-year growth in ADV
from KCG algorithms and EMS
Consolidated U.S. equity share volume
KCG algorithms and EMS share volume
2013
KCG develops advanced trading technologies in-
house for greater connectivity, efficiency and scale.
Agency-based trading between principals to
transactions
Proprietary trading as a liquidity provider
Principal trading in a market making capacity
Sources: KCG, VistaOne Solutions, BATS Global Markets, Rosenblatt Securities;
Trade volumes prior to July 1, 2013 represent combined activity
from affiliated broker dealers of GETCO Holding Company, LLC and Knight Capital
Group, Inc. |
 A
Growing Presence in Strategic Asset Classes KCG is an active participant in
all major global markets for equities, futures, options, fixed income,
foreign currencies and commodities.
Advanced trading technologies allow KCG to engage
in direct-to-client market making and proprietary
trading in attractive segments of the global
securities market in an efficient manner.
KCG Europe deploys the full core capabilities in a
region undergoing significant change from market
and regulatory forces.
Trading venues KCG Hotspot and KCG BondPoint
offer clients centralized liquidity, efficient price
discovery and cost-effective trading in asset classes
that are still-outmoded in terms of technology.
KCG intends to continue aggressively seeking
opportunities in segments of the market that are
predominantly electronic, reasonably liquid and
centrally cleared.
Sources: KCG, BATS Chi-X Europe, EBS, Reuters, TRACE; Trade volumes prior to
July 1, 2013 represent combined activity from affiliated broker dealers
of GETCO Holding Company, LLC and Knight Capital Group, Inc. 5
5%
6%
7%
8%
9%
10%
11%
12%
13%
14%
15%
16%
17%
18%
19%
20%
Jan
2013
Feb
2013
Mar
2013
Apr
2013
May
2013
Jun
2013
Jul
2013
Aug
2013
Sep
2013
Oct
2013
Nov
2013
Dec
2013
Growth in market share of agency transactions
in corporate bonds and institutional spot FX
KCG BondPoint market share of corporate bond transactions under 250 bonds
KCG Hotspot market share of institutional spot FX volume among reporting
venues 34.5%
0%
5%
10%
15%
20%
25%
30%
35%
40%
2013
Year-over-year growth in
European equity notional value traded
(inUSD)
Pan-European Stock
Exchanges KCG Europe |
 Drivers of Financial Results
Sources: KCG, BATS Global Markets, VistaOne Solutions; Trade volumes and revenue
capture prior to July 1, 2013 represent combined activity from affiliated
broker dealers of GETCO Holding Company, LLC and Knight Capital Group, Inc.; For historical
KCG U.S. equity market making trade volumes, go to:
https://www.kcg.com/access-performance/liquidity. 6
KCG’s financial results are influenced by a number of
factors primarily:
clearance fees and payments for order flow
Transaction costs including execution and
trading strategies
The performance of mid-
and high-frequency
The composition of order flow executed
Realized volatility
Retail SEC Rule 605-eligible volume
Consolidated U.S. equity volume
The competitiveness of the client offering and
effectiveness of trading strategies
For example, factors in KCG’s core U.S. equities
market making include:
Overall market volumes and related volatility in
asset classes in which KCG is an active participant
Consolidated U.S equity volume
Retail SEC Rule 605-eligible U.S equity volume
|
 KCG Risk Management
Adverse change in the market value of portfolios and financial instruments
caused by a change in market prices, spread, or rates
Financial or other loss derived through failure,
non-performance or underperformance of a
counterparty
Risk of loss resulting from inadequate or failed internal processes, systems,
human error or external events; includes legal risk and reputational risk
that materialize as a consequence of an event
Risk of loss resulting from high-speed intra-day
activities managed by real-time risk processes and
controls including:
KCG’s risk management framework provides comprehensive controls and
processes for ongoing management and monitoring of the major risks
associated with the firm's daily business activities.
7
An Emergency Response Center creating transparency
around and managing responses to operational incidents and
technology changes during global trading hours
Edge controls and kill switches designed to prevent erroneous
orders from being submitted to exchanges and ATSs
Position limits to control the amount of intra-day as well as
end-of-day risk
Operational
Risk
Real-Time
Risk
Credit
Risk
Market
Risk |
 Merger-
and Integration-Related Synergies
KCG exceeded the upper range of the projected
$90 to $110 million in cost synergies on an
annualized, run-rate basis by the end of 2013.
Additionally, KCG reduced the annual run-rate
expense from communications and data processing
at the end of the year by more than $20 million to
$150 million. Further reductions on a run-rate
basis are expected by the end of 2014.
The integration of core revenue-generating
activities is demonstrating promise:
8
Compensation and benefits
Communications and data processing
Depreciation and amortization
Professional fees
Occupancy and equipment rentals
Business development
Other
$0
$50,000
$100,000
$150,000
$200,000
$250,000
$300,000
$350,000
$400,000
$450,000
$500,000
1H13
2H13
KCG Non-GAAP Operating Expenses*
(Excluding execution and clearance fees, payments for order flow and
interest) In U.S. equity market making, KCG is at work
on generating greater revenue opportunities,
increasing internalization rates and lowering
execution and clearance fees on a relative basis
In Europe, KCG completed a restructuring,
combined the product portfolios and integrated
sales
In agency-based algorithms, KCG combined the
product portfolios and fully integrated sales with
institutional equity sales trading
* Operating expenses prior to July 1, 2013 represent consolidated financial
results from GETCO Holding Company, LLC and Knight Capital Group, Inc.
See Addendum for a reconciliation of GAAP to non-GAAP financial
results. |
 Additional Savings from Debt Reduction
Aggregate long-
and short-term debt of
approximately $957 million as of September 30,
2013 consisting of:
$535 million term credit agreement
$305 million senior secured notes
$117 million legacy Knight convertible notes
Subsequent repayments:
$200 million repayment of the term credit
agreement on October 23, 2013
$100 million repayment of term credit
agreement on December 4, 2013
$100 million repayment of term credit
agreement on January 22, 2014
$85
million
repayment
of
term
credit
agreement
on
March
19,
2014
Future dates to note:
$300mn in repayments in 4Q13
Convertible notes mature
$185mn in repayments in 1Q14
9
$4,000
$5,000
$6,000
$7,000
$8,000
$9,000
$10,000
$11,000
$12,000
$13,000
$14,000
$15,000
$16,000
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
Indicative quarterly interest expense
from
long-
and
short-term
debt
(as of March 19, 2014 assuming no further repayments)
2-year non call on senior secured notes
expires June 5, 2015
Legacy Knight convertible notes mature
March 15, 2015 |
 Prospects for Growth from Core Capabilities
Trading
Venues
Agency
Execution
Market
Making
Generating added revenue
opportunities in U.S. equities while
increasing internalization rates and
lowering execution fees
Growing direct-to-client market
making in European equities by
providing outsourced trade execution
to banks
Developing, refining and expanding
proprietary trading in global equities,
fixed income, currencies and
commodities
Capitalizing on the adoption of
electronic trading in markets –
including FX and fixed income –
that remain largely manual, non-
transparent and illiquid
Increasing penetration
of agency-based
algorithms among
institutions through
continued product
innovation and
coordinated sales
efforts
In addition, pursuing new prospects available to a non bank created by the
implementation of regulations designed to reduce risk and increase
competition in certain securities markets. 10
KCG’s
core
capabilities offer prospects for multiyear organic growth from both
near-term strategic initiatives
and
medium-
to
long-term
industry
trends. |
 Addendum |
 Regulation G Reconciliation of Non-GAAP
Financial Measures (Continuing Operations)
6 months ended June 30, 2013
GETCO
Knight
Discontinued
operations**
Adjustments for
non-GAAP
presentation*
KCG pro forma
Incremental
debt and deal
costs***
KCG adjusted,
normalized pro
forma expenses
Reconciliation of pro forma GAAP expenses
to normalized pro forma non-GAAP
expenses:
Employee compensation and benefits
108,761
243,070
(15,706)
(61,853)
274,272
—
274,272
Execution and clearance fees
86,908
101,881
(5,128)
—
183,661
—
183,661
Communications and data processing
41,873
45,377
(412)
—
86,838
—
86,838
Interest
2,645
26,325
(2,156)
(19)
26,795
12,608
39,403
Depreciation and amortization
15,913
19,632
(1,115)
—
34,430
4,444
38,874
Payments for order flow
1,701
64,592
(21,084)
—
45,209
—
45,209
Professional fees
30,264
35,438
(945)
(55,525)
9,232
—
9,232
Occupancy and equipment rentals
8,184
10,682
(2,495)
—
16,371
—
16,371
Business development
—
7,730
(1,389)
(306)
6,035
—
6,035
Writedown of assets and lease loss accrual
3,697
17,787
(17,787)
(3,697)
—
—
—
Other
15,039
30,491
(2,351)
(23,228)
19,951
1,461
21,412
Total expenses
$ 314,985
$ 603,005
$ (70,568)
$ (144,628)
$ 702,794
$ 18,512
$ 721,306
* Operating expenses prior to July 1, 2013 represent combined financial results
from GETCO Holding Company, LLC and Knight Capital Group, Inc. The non-GAAP adjustments incorporate the effects of
professional fees related to the Mergers and fees related to Knight's August 1,
2012 technology issue; the acceleration of compensation expense related to certain unit-based awards that vested upon the
Mergers; compensation expense related to a reduction in workforce; writedowns of
assets and lease loss accrual primarily related to office consolidations.
** In addition to discontinued operations, includes line items
reclassifications to adhere to current presentation. *** Incremental debt
and deal costs are added in to normalize the comparison to first half results as though the Merger and debt raise
occurred on January 1, 2013. Totals may not add due to rounding.
11 |
 Regulation G Reconciliation of Non-GAAP
Financial Measures (Continuing Operations)
* The non-GAAP adjustments incorporate the effects of professional fees
related to the Mergers and fees related to Knight's August 1, 2012
technology issue; compensation expense related to a reduction in
workforce and the departure of the ETF management team; writedowns of assets and
lease loss accrual primarily related to office consolidations; writedown of capitalized debt costs related to early
repayment of debt. Totals may not add due to rounding.
12
6 months ended December 31, 2013
KCG
Adjustments for
non-GAAP
presentation*
KCG pro forma
Reconciliation of pro forma GAAP
expenses to normalized pro forma
non-GAAP expenses:
Employee compensation and benefits
241,840
(28,851)
212,989
Execution and clearance fees
159,506
—
159,506
Communications and data processing
81,558
—
81,558
Interest
42,140
(2,982)
39,158
Depreciation and amortization
39,657
—
39,657
Payments for order flow
34,674
34,674
Professional fees
16,811
(5,718)
11,093
Occupancy and equipment rentals
18,256
—
18,256
Business development
4,567
(597)
3,970
Writedown of capitalized debt costs
13,209
(13,209)
—
Writedown of assets and lease loss accrual
11,436
(11,436)
—
Other
24,384
(756)
23,628
Total expenses
$ 688,038
$ (63,550)
$ 624,488
— |
 |