By Bradley Hope 

The market-making arm of hedge fund Citadel LLC is in talks to buy the seats on the floor of the New York Stock Exchange owned by KCG Holdings Inc., according to people familiar with the matter.

Citadel Securities, a group owned by the Chicago-based hedge fund, is the would-be acquirer in the deal, the people said. The group is best known for its so-called wholesaler business that executes orders from retail investors on behalf of big brokerages such as TD Ameritrade Holding and Fidelity Investments.

The deal comes after Global Trading Systems, the New York-based high-frequency trading firm, last month said it agreed to buy the NYSE seats of British bank Barclays PLC.

Computerized trading firms such as Citadel Securities and GTS are playing an increasingly prominent role in a floor-trading business that was long the domain of big banks and specialist firms.

Citadel and KCG couldn't immediately be reached for comment.

KCG is the product of a 2013 merger between Knight Capital and high-frequency trading firm Getco LLC.

Designated market maker businesses have been in the spotlight after the market tumult of Aug. 24th last year. On that day, volatility was worsened in some cases because of choices made by floor traders, market observers say.

J.P. Morgan Chase & Co. fired KCG as its market maker in part due to its poor performance on that day, The Wall Street Journal previously reported. Shares of the bank fell more than 20% in early trading, before regaining most of the losses during the day. This happened despite there being no significant news on the company.

The acquired businesses are technically "designated market maker" licenses with NYSE Group, the arm of Intercontinental Exchange Inc. that operates the New York Stock Exchange's businesses from Wall Street in lower Manhattan.

KCG CEO Daniel Coleman told analysts on a conference call last Friday that its designated market maker group was a shrinking part of its business.

"I think the DMM business is a business that has provided value for us in the past," he said. "The only thing I would say, it's not a big business for us. And with all of our businesses, we have been reviewing them."

Designated market-makers are the men in colorful jackets that stand at posts in the center of the trading floor. Their job has greatly diminished over the years, but they are still in charge of the opening and closing of particular stocks--companies listing on the exchange choose one as a step in going public--and they step in at times of volatility to bring order to trading. They also play a role during initial public offerings.

Having floor-based traders might appear like a contradiction for firms that do all their trading using computers programmed with algorithms that react to changes in market data. But by taking on this responsibility, firms get access to lower trading fees and higher rebates.

At NYSE and other markets, traders that "post" orders--meaning leave their orders on the exchange for others to trade against--are paid a rebate and those that "remove" those orders pay a fee.

High-frequency firms, including Virtu Financial Inc. and IMC Financial Markets, are dominant players in floor trading.

Ari Rubenstein, co-founder and CEO of Global Trading Systems, said firms like his were increasingly dealing with market participants directly.

In the past, his firm kept a low profile and focused on trading anonymously on the markets. After the Barclays acquisition, his company will oversee the opening and closing auctions for 1,200 listed companies.

"The next phase of our business is dealing directly with companies and institutions," he said in an interview.

Global Trading Systems was seeking to offer listed companies new types of data and analysis on how their stocks are trading throughout the market, Mr. Rubenstein said. That analysis would be powered by information the company collects as trades across the markets as well as in private trading venues known as dark pools.

Write to Bradley Hope at bradley.hope@wsj.com

 

(END) Dow Jones Newswires

February 03, 2016 17:06 ET (22:06 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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