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Getco Takes Floor Against the Tide

Thursday, December 01, 2011



For the past 12 years, electronic market-maker Getco LLC has worked to make floor-based trading look like the horse and buggy of financial markets. Now, in effect, it wants to dominate the horse-and-buggy business.

On Wednesday, Getco said it reached an agreement to buy most of Bank of America Corp.'s floor-trading operation at the New York Stock Exchange. While terms of the deal weren't disclosed, the Chicago-based company said it will become the exchange's second-largest designated market-maker, handling about a third of all daily stock trades there. It will buy and sell bellwether stocks including General Electric Co., Wal-Mart Stores Inc. and McDonald's Corp.

"We're moving onto a bigger canvas," Getco co-founder Stephen Schuler said in an interview.

The move is a dramatic shift for Getco, one of the biggest companies using computer models to eke out profits at high speed from minute fluctuations in the prices of stocks, futures and options. In beefing up its presence on the NYSE floor, the firm aims to expand its trading business at the exchange while burnishing its reputation with investors that still prefer to route trades through specialists.

Instead of trying to persuade investors to bypass trading floors, Getco intends to use its technology to supply more competitive prices to the NYSE floor, attracting more business there and boosting its profile among financial institutions it hopes to land as buyers of trading services.

The company believes it can profit from the business because its floor personnel will use the same systems that power Getco's automated trading, scanning dozens of platforms to help assess supply and demand for a given stock, said Dave Babulak, Getco's head of strategic initiatives.

The firm's quiet evolution from obscure Midwestern trader to prominent market maker underlines the way electronic-trading platforms have transformed the world's stock markets and pushed old-line markets like the NYSE to adapt.

"It's another affirmation of the new generation of automated liquidity providers becoming dominant in today's market," said Justin Schack, managing director for Rosenblatt Securities. "They're really going to have a chance to shine here."

As recently as the 1990s, the NYSE floor was teeming with specialists who executed trades on behalf of their firms. Their role diminished in recent years due to the rise in electronic trading—the number of specialist firms working the floor has dwindled to four from 35 at the beginning of the past decade.

Goldman Sachs Group Inc., one of the four firms working the NYSE floor, in January wrote down $305 million in the value of its own market-making business, which it pegged at $391 million in the third quarter of 2010.

But many investors still prefer to trade through specialists, and Getco sees this transaction as a way to get their business and enhance its standing on Wall Street. Specialist firms bear responsibility to buy and sell in their assigned securities, smoothing trading imbalances and explaining market movements to share issuers.

The deal will reduce Bank of America's day-to-day presence on the NYSE floor to a handful of people from roughly two dozen, said a person familiar with the situation. The remaining brokers are part of a separate business that still executes trades for the company. Bank of America will now have an NYSE presence similar to that of rival J.P. Morgan Chase & Co.

Getco, which already maintains a presence on the NYSE floor following a similar deal in early 2010, will now have between 45 and 50 specialists on the floor, up from about 20.

Mr. Schuler said he and co-founder Dan Tierney envision Getco as a "100-year company," with plans to develop a roster of institutional customers and expand its slate of stock-trading services into new markets like bonds and currencies.

The firm formulated the strategy two years ago and has added to its management team and pursued deals as part of a long-term plan that could one day see Getco float shares in an initial public offering, though such a move isn't currently under consideration. "Right now, we don't need it, so it's not on our radar, but it could be in the future," Mr. Schuler said.

The company operates on more than 50 exchanges and trading venues around the world and typically ranks among the top five participants on electronic markets run by NYSE Euronext, as well as futures platforms like CME Group Inc. and Deutsche Börse AG's Eurex unit.

Getco is expanding its profile with both issuing companies and money managers that buy and sell stocks at a time when regulators are scrutinizing high-frequency trading. Their concerns center on the potential power of their systems to abruptly shift prices.

Mr. Schuler said Getco has also thought about one day applying to become a primary dealer with the Federal Reserve, which would allow the firm to participate in Treasury auctions.

The transaction will see Bank of America-supervised stocks and securities transferred to Getco over the next four weeks. Barclays PLC maintains the largest NYSE floor presence.

The sale is the latest attempt by Bank of America to unload assets as Chief Executive Brian Moynihan tries to shore up the balance sheet of the Charlotte, N.C., lender ahead of new international capital standards.

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