After losing $440 million and seeing its shares close at $2.58/share on Thursday, down 75% over the last two trading days, Knight Capital Group has been reportedly seeking additional funding sources to shore up its capital. To do this, Knight will need to sell assets or succumb to selling a huge chunk of its company as bargain basement prices. One asset that is sure to find suitors is Hotspot FX, the company’s Forex ECN trading network.
Demand for institutional Forex products remains strong, as seen by the recent acquisition of FXAll for $625 million by Thompson Reuters and a smaller deal of FXCM buying Lucid Markets in June for $176 million. While only a third of the size of FXAll in terms of daily FX volumes, Hotspot’s $30 billion/day in trading on its network accounts for 9.4% of all publically reported Forex trading. Based on the valuation FXAll received, a Hotspot FX sale could go for north of $200 million. This compares with the $77.5 million price tag Knight paid for Hotspot six years ago.
The potential of a Hotspot sale was also highlighted yesterday in the WSJ’s Deal Journal. The report sifted through potential Knight assets that could be sold and Hotspot was at the top of the list of non-equity units, based on the ECN’s fast growth in grabbing market share.
Another reason why Hotspot could be attractive to buyers is the unit’s culture. Although owned by Knight, Hotspot has always been run as a separate unit with a culture based on providing institutional FX trading, rather than being simply the Forex division of Knight (Personal note: my experiences with Hotspot employees was that when I mentioned Knight Capital and their achievements, it was ignored. Reminded me of Michael Lewis’s Liars Poker and “Equities in Dallas” was purgatory for the bond players.) As such, a buyer would find Hotspot easier to integrate than if it were a more involved unit within its parent group.
Who would be a possible suitor?
Although not often mentioned among financial M&A deals Bloomberg could be a good fit for Hotspot. The business media giant already manages its agency trading platform Tradebook. Buying Hotspot FX would be allow them to gain a greater footprint among Forex traders and give them access to selling Bloomberg’s trading analytics and algo products to Hotspot’s clients.
Another broker that would seemingly need to mentioned in any talk of a Forex acquisition is Japanese broker Monex. Monex has been an aggressive purchaser, buying both Tradestation and IBFX last year. A Monex/Hotspot hook up could also offer synergy advantages as one of Hotspot’s weaknesses has been the drop of trading volumes during the Asian session. While spreads on Hotspot’s ECN remained fairly tight during the Asian period, combining with Monex would be expected to increase liquidity from Asia onto the ECN.
Among investment banks, Goldman Sachs has been involved with several Forex related purchases over the last few years. While these deals haven’t been successes for the firm, it has shown their interest in the space. With Hotspot, they could view the ECN as an established profit center that they could integrate into their REDI trading platform.
Among long shots, futures trading exchanges could see the potential of adding Hotspot’s network and technology. With the steady increase of Forex futures trading volume, adding the ability to trade spot side by side could be a selling point to traders. While technology wise, the exchanges would probably interested in Hotspot, being regulated entities makes them long shots, as they may not be able to act fast enough to get a deal done to satisfy Knight’s immediate funding needs.
I like the analysis here. Bloomberg should snap up Hotspot. Would be a good synergy and a good riposte to Reuters purchase of FX All. FX is Bloomberg’s big weak spot, and this purchase could really help them. But then Bloomberg needs to sell terminals…..that is there business model. Maybe hotspot doesn’t necessarily fit in with that….?