(Adds when deal is expected to be completed in seventh paragraph.)
Nov. 30 (Bloomberg) -- Getco LLC agreed to buy Bank of America Corp.’s New York Stock Exchange market-making business, vaulting it to second place based on the number of securities it oversees at the world’s largest bourse.
Financial terms weren’t disclosed. Once the deal closes, Getco, currently the smallest of the five primary brokers handling NYSE-listed companies, will be the designated market maker for about 650 companies and 850 securities at the exchange, according to a statement. Barclays Plc handles almost 1,200 securities. Knight Capital Group Inc. and Goldman Sachs Group Inc. also operate market-marking units at the exchange.
Getco, a Chicago-based high-frequency-trading specialist founded in 1999, became a NYSE designated market maker after buying the right to handle 350 stocks from London-based Barclays in 2010. DMMs manage the auctions at the start and end of each day for NYSE securities and provide continuous bids and offers.
“Getco had a good experience with their first entrée in the DMM business and they’ve had some good success along the way, but they did have a relatively small book,” Joseph Mecane, co-head of U.S. listings and cash execution at NYSE Euronext, the parent of the NYSE, said in a phone interview. “This enables them to get to a bigger scale and gives them a very significant presence.”
As NYSE shifted from a floor-based market in which humans manually handled most trading a decade ago to a primarily electronic exchange, the former specialists merged or gave way to designated market makers. There were 25 specialist firms as recently as 2000, according to NYSE. Once Getco buys the Bank of America business, there will be four firms that are designated market makers, the successor of the specialist system.
“Our role at NYSE is an important one for us,” Daniel Coleman, global head of equities and client services for Getco, said in a phone interview. “We want to make sure we have a prominence there. It’s a great opportunity to build a franchise and get to be known by some of their core clients.”
Getco provides liquidity in the form of bids and offers on more than 50 exchanges and venues globally and is among the top five trading firms by volume on exchanges including NYSE, NYSE Arca, the Chicago Mercantile Exchange, Eurex in Frankfurt and other markets, according to the company. The deal announced today is expected to close in mid-December, Coleman said.
The firm expects to retain the “vast majority” of Bank of America’s 30 employees on the NYSE floor, said Coleman, former global head of equities at UBS AG. The acquisition will boost Getco’s staff to about 400, including about 20 people currently on the floor who are overseen by Todd Abrahall, a former NYSE liaison with specialist firms who joined Getco in 2010. Edward Boyle, who ran NYSE Euronext’s options business, moved to Getco earlier this year.
LaBranche & Co., once the largest specialist on NYSE, sold its floor-based unit to Barclays for $25 million in January 2010, exiting a business it entered in 1901 when George M.L. LaBranche began trading shares of U.S. Steel at the outdoor market on Broad Street in Manhattan, according to the company’s website. Getco became a DMM when it bought a portion of Barclays’ business the same month to reduce the number of securities that firm handled.
Knight Capital Group, based in Jersey City, New Jersey, established itself as a designated market maker when it purchased the DMM business of Kellogg Group LLC last December.
The only one of seven specialist firms operating on NYSE in 2004 that remains a designated market maker owned by the same company is Goldman Sachs’ Spear, Leeds & Kellogg Specialists unit. LaBranche, Bear Wagner Specialists, Fleet Specialist, Van der Moolen Holding NV, Performance Specialist Group and SIG Specialists sold their operations to other firms or left the business. Barclays acquired several market-making units.
Firms engaged in high-frequency trading assumed a bigger role as quoting obligations weakened and exchange rules changed over the last decade, shrinking profits at market-making firms. These traders relied on computers to manage their risks and help them make money on ever-smaller spreads, or the difference between the bid and offer prices. Abusive practices by Nasdaq market makers in the mid-1990s and NYSE specialists in the last decade drove the Securities and Exchange Commission to adopt rules to increase competition and spur electronic trading.
“This is very much a scale and technology business” for market makers, Mecane said. “When it comes down to pricing and what people are willing to pay and how their margins work in performing the business, it is somewhat dependent on their ability to manage fixed costs and scale up the model.”
Among the companies Bank of America’s market-making unit handles are McDonald’s Corp., Wal-Mart Stores Inc., Goldman Sachs and Home Depot Inc. While Getco is purchasing the bank’s “book” of issuers, the companies must agree to the switch, Coleman said. The firm currently oversees trading in companies including General Motors Co., MasterCard Inc. and NYSE Euronext.
“This is a natural extension of our market-making business,” Coleman said. Getco wants “to be recognized as a player and firm that will be here for a long time.”
--Editors: Nick Baker, Stephen Kleege
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