The future of Hotspot FX? Knight merges with Getco

By:
Hamish Risk
Published on:

There has been much speculation since August about the future of Hotspot FX after the calamitous events of the summer when a rogue algorithm caused its parent company, Knight Capital, to inadvertently buy billions of dollars of stocks which led to a $461 million loss.

At the time, there was a view that Knight would need to sell businesses like Hotspot FX, which are non-core to its equity trading operation, as part of a rescue package. In the end, it didn’t need to as part of a $400 million rescue package that saw the company give up more than two-thirds of its equity, of which Getco, who have now acquired Knight outright, owned a 15.6% stake.

The question now is what will Getco want to do with Hotspot? Combined, Getco and Knight will now be the dominant player in US equity market making, and thus, it may look to sell off its assets that trade other asset classes, although, it isn’t clear what the firm’s strategy is here.

In a note published yesterday, Niamh Alexander, an analyst at Keefe, Bruyette, & Woods, said: "Given some of the $720 million of cash payout will be funded with borrowed cash, we would anticipate some of the electronic businesses might be sold to help pay down debt used to finance the deal, such as Hotspot or Bondpoint and Astor Asset Management, potentially KCG’s stake in Direct Edge, but we don’t know management’s plans yet."

And there may be plenty of potential buyers too. Rumoured buyers include Nasdaq OMX which could be seeing the potential in Hotspot FX as a means to quickly expand its assets offering. Some analysts have argued that Icap-EBS or State Street’s Currenex might consider taking a closer look at further consolidating the sector.

Ultimately there shouldn’t be any shortage of interested parties looking to get an entry into FX. Sources say there are numerous private equity firms and equity market ECNs looking at the FX asset class and this might present an ideal opportunity.