Just two days after releasing trade volumes for the month of December 2016, KCG Holdings, Inc. (NYSE: KCG) announced consolidated earnings of $196.2 million, or $2.47 per diluted share, for the fourth quarter of 2016.
Included in the fourth quarter pre-tax earnings of $309.9 million is a pre-tax gain of $331.0 million from the sales of substantially all shares of Bats Global Markets, Inc. (Bats:BATS) owned by KCG.
Fourth Quarter Highlights
- KCG recorded a pre-tax gain of $331.0 million from the sales of shares in Bats
- KCG Market Making increased market share of retail SEC Rule 605 U.S. equity share volume 5.0% YoY
- KCG Algorithmic Trading grew average daily U.S. equity share volume from the 25 largest U.S. asset managers 49.5% year over year
- KCG BondPoint set a new quarterly record for average daily fixed income par value traded with a 39.1% rise year over year
- KCG reduced total shares outstanding by 22% during the quarter
Daniel Coleman
Daniel Coleman, Chief Executive Officer of KCG, said:
During the fourth quarter, we monetized a longstanding investment in Bats through a swap of substantially all of our stake for all KCG shares and warrants owned by General Atlantic. After the transaction plus additional open market purchases, KCG’s shares outstanding declined to 67.2 million from 86.2 million from the prior quarter and the number of warrants outstanding decreased to 5.1 million from 13.2 million. Since the merger, KCG has returned a cumulative $835.7 million to equity stakeholders. Our focus on creating value for stockholders enabled KCG to increase tangible book value per share to $18.71 as of the end of 2016. From an operating perspective, revenues in the fourth quarter fell below our expectations reflecting the continuation of a difficult trading environment. However, a rise in revenues on an operating basis from the prior quarter reflects the improved market conditions starting in November.
Full Year 2016
In 2016, KCG continued to distinguish itself as an emerging, independent, pure-play, technology-driven intermediary in liquid financial instruments. Growth in core segments of market making and agency-based trading outpaced market volumes. The firm undertook an initiative to re-engineer the trading architecture. KCG reduced the ratio of compensation to net revenues year over year to 42.2 percent. In addition, the firm returned $364.7 million to equity stakeholders through repurchases of shares and warrants during the year.
Mr. Coleman commented:
KCG’s long-term growth is aligned with profound, secular changes in technology, regulation and competition. We are concentrating on attaining scale to enable us to grow without creating significant costs. In the past year, we’ve undertaken a re-engineering of the trading architecture while managing revenues in a difficult operating environment. In 2017, we’re focused on returning our revenues to previous levels, changing our infrastructure and returning capital to shareholders when prudent.
Market Making
The Market Making segment encompasses direct-to-client and non-client, exchange-based market making across multiple asset classes and is an active participant in all major cash, options and futures markets in the U.S., Europe and Asia. During the fourth quarter of 2016, the segment generated total revenues of $168.3 million and a pre-tax loss of $8.5 million.
In the fourth quarter of 2016, investors remained defensive at the outset and continued to reduce exposure to U.S. equities. A period of heightened trading activity around the U.S. election dissipated quickly. For the quarter, consolidated U.S. equity volume remained flat year over year while realized volatility declined and bid-ask spreads tightened. Despite continuing strong competition, KCG Market Making grew market share of retail SEC Rule 605 U.S. equity share volume by 5.0 percent to approximately 32.4 percent.
In the third quarter of 2016, the segment generated total revenues of $136.1 million and a pre-tax loss of $13.8 million.
In the fourth quarter of 2015, the segment generated total revenues of $168.2 million and a pre-tax loss of $5.1 million, which included charges related to asset writedowns of $14.2 million.