By Bradley Hope
Every Monday morning for the past 20 months, Daniel Coleman has
stepped off his private jet from Alabama and straight into a
storm.
The southerner is chief executive of KCG Holdings Inc., the New
Jersey-based company that was formed after a computer-trading
glitch forced financial-services firm Knight Capital Group to merge
with a high-speed trading firm.
Since he took over, tensions between the former employees of
both firms have escalated, culminating in an anonymous letter to
KCG's board late last year warning of an "open rebellion."
Meanwhile, the share price has hardly budged and a once-profitable
high-frequency trading business has been running at a loss,
according to people familiar with the matter.
In a sign of continuing struggles to get the two companies to
mesh, all of the top Knight-era executives have left. Two departed
this month, including the executive who long oversaw a key part of
Knight's market-making business, the main profit engine for
KCG.
Mr. Coleman acknowledged that the combination has been "tough,"
but said the firm is finally emerging from a difficult integration
in which it has sold assets, reduced head count and begun to create
a new culture.
He said KCG is positioning itself as a new kind of securities
firm, using technology from its high-frequency-trading business to
bolster its more traditional trading services. He cited a new
trading algorithm called Catch that is designed to help clients buy
and sell stock cheaply.
"We're figuring out ways to bring a new firm to life, rather
than shed vestiges of other firms," said Mr. Coleman, 50 years old,
who speaks with a trace of an Alabama accent. Mr. Coleman travels
between his home in Birmingham, where he lives with his wife and
three children, and KCG's offices in the U.S., London and
Singapore.
There are signs of progress at KCG. The fourth quarter was its
best since the merger, with the firm earning $26.5 million on $346
million of revenue.
Yet analysts and industry observers note the lion's share of the
company's profit still comes from one business: wholesale market
making. That business pays retail brokerages such as Fidelity
Investments and TD Ameritrade for the right to execute retail stock
trades and makes money by trading against those orders.
"The biggest question is what can this firm achieve," said
Richard Repetto, an analyst at Sandler O'Neill + Partners. "They've
taken out costs, restructured debt and sold noncore assets. Now
it's about can they put up some good financial results."
KCG was born out of a mistake. In August 2012, a
computer-trading glitch caused Knight to enter millions of faulty
trades in less than an hour. When the dust settled, Knight lost
$440 million. The company frantically raised money to save the
business but ultimately chose to merge with a shareholder, Getco, a
little-known Chicago-based high-frequency-trading firm. Mr.
Coleman, who had joined Getco only two years earlier, took over the
combined firm.
The vision behind the merger was that KCG would take the best
from both companies. Knight Capital had strong relationships with
customers and a roster of profitable businesses. Getco had
cutting-edge technology and high-frequency traders, who primarily
made money by making markets on exchanges around the world.
But the integration proved trickier than expected, current and
former employees said, in part because Getco's businesses emerged
as a drag on the company.
Last fall, an anonymous letter addressed to KCG's board and
shareholders surfaced. It said some of the Getco-era businesses
were "performing poorly" and that KCG's "corporate culture is in
disarray with employees close to open rebellion and fleeing in
droves," according to a copy of the letter reviewed by The Wall
Street Journal.
Soon after the letter began circulating, KCG said Steven Bisgay,
its chief financial officer and longtime Knight employee, left the
firm but didn't give any explanation. Mr. Bisgay, who joined Cantor
Fitzgerald LP as finance chief last month, declined to comment.
Mr. Coleman said he held a call with the staff that directly
reported to the management team. On the call, he "acknowledged the
emotion in the letter" and "straightened out inaccuracies," he
said.
The departures have continued. Last week, the last member of
KCG's management team who was formerly at Knight left the company.
That exit closely followed the abrupt resignation of George Sohos,
longtime head of the market-making business.
Mr. Coleman, who rose from an options pit trader in Chicago to
become UBS AG's global head of equities, has largely replaced
departed Knight-era managers with executives he had worked with.
For instance, Mr. Coleman last year appointed Philip Allison, a
former global head of cash equities at UBS, as chief executive of
KCG Europe.
Another move that antagonized some employees from the Knight era
was switching most employees from a direct commission to an annual
bonus plan, leading to declines in overall compensation for some.
Mr. Coleman also eliminated corporate titles such as managing
director and executive vice president, replacing them with simple
functional titles.
Many lost their jobs or joined new firms after legacy Knight
businesses were sold. As of the end of the fourth quarter in 2014,
the firm had 1,093 employees, down from about 1,930 immediately
after the merger.
"For some people, their world turned upside down with this
merger," Mr. Coleman said.
Mr. Coleman said those changes, while "disruptive," were the
right choices as he sought to position KCG as a global market maker
and specialist in trading securities. The 2008 financial crisis and
ensuing regulations have created an opportunity for smaller
companies like KCG to take over businesses long controlled by big
banks, he said.
A major challenge in the months ahead will be improving the
performance of the legacy Getco high-frequency trading business,
which has been running at a net loss recently, according to people
familiar with the matter. Part of this stems from an increasingly
competitive marketplace and lower volatility, which often fuels
profits for this type of trading.
Mr. Coleman declined to confirm or deny the business was losing
money because the firm doesn't disclose details about the
performance of each unit. But he said the group's revenue had
increased for the last three quarters.
"Over time, it'll be harder to differentiate between what was
Knight and Getco," he said.
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