LeapRate Exclusive… We’ve speculated a number of times since Knight Capital’s merger with Getco in mid 2013 to form KCG (e.g. see here), that KCG was likely to put Hotspot FX up for sale at some point to focus on its core equity market making businesses. And it seems as though we were right – KCG has now formally put its Forex ECN unit Hotspot FX up for sale.
As we indicated in our article earlier today on KCG’s third quarter results, buried in the fine print was a line by KCG stating:
As KCG continues to evaluate how best to realize untapped value throughout the company, KCG has begun to explore strategic options for KCG Hotspot, with the goal of executing on opportunities if it creates additional value for our stockholders, clients and employees. KCG has not made a decision to enter into any transaction at this time…
What that means, in Wall Street speak, is that Hotspot is officially for sale, and that KCG has (likely) hired investment bankers to begin a process and solicit bids. Why else would KCG make a public announcement like that, which can also unnerve clients and employees?
So how much might Hotspot FX be worth?
At around the time of the Knight Capital-Getco merger, we speculated that Hotspot FX was likely worth about $150-$200 million, based on financial information available to us at the time and evaluation of comparable transactions, such as the Thomson Reuters (NYSE:TRI) purchase of FXall for around $625 million in 2012.
Hotspot FX volumes are roughly at the same level now that they were back when me made those calculations – 2014 volumes have averaged $28.5 billion (excluding September’s record volumes), versus $29.7 billion in 2013 and $25.4 billion in 2012. So we stick by our $150-$200 million analysis. But KCG might be holding out for more.
The other major issue is, of course, who might line up to buy Hotspot FX? This is an industry which has been gaining scale and consolidating, such as the Thomson Reuters – FXall hookup we mentioned above. so a name like State Street, Bloomberg, or Thomson Reuters itself certainly could make sense. But buyers could include a wide number of financial institutions which might want a larger piece of the growing electronic trading FX pie.
Stay tuned to LeapRate, we’ll bring you more as this story unfolds…