KCG Holdings Inc. is not pursuing companywide strategic options, but it has decided to shutter the corporate bond market-making business as part of an ongoing product review, according to CEO Daniel Coleman.
KCG's market-making business — its largest revenue-generating segment — produced a pretax loss of $8.5 million during the fourth quarter of 2016. This marked the second straight quarter in which market making reported a loss.
KCG as a whole was able to report consolidated pretax earnings of $309.9 million in the fourth quarter of 2016 in part because of its Bats Global Markets Inc. stake sale, which generated a pretax gain of $331.0 million. But Coleman during an earnings conference call admitted he was disappointed with operating results in the most recently completed quarter.
Given the challenges to its business, an analyst asked if KCG would consider pursuing strategic options. Coleman said he believes KCG can create a scalable company, and that "dwarfs any other strategic opportunity."
"We are not focused on other opportunities than turning this business around and growing revenues," he said.
Coleman noted that some headwinds have started to abate. For instance, he said the difficult operating conditions the company faced in September 2016 continued into the following month, but revenue capture for its U.S. equities market-making business reverted to historical levels in the last two months of that year.
"KCG's core revenue driver is still intact," he said.
Coleman said KCG management team members were concerned about declining revenues from non-U.S. equities market-making offerings and were reviewing those products. Non-U.S. equities products made up about 15% of KCG's market-making revenue in 2016, but gross revenue from those products dropped to about $117 million in 2016 from about $175 million in 2015, Coleman said.
The review led to the determination that KCG would shut down the corporate bond business. Coleman called the move a hard decision. However, he believes the shuttering of the business will better allow the company to "re-engineer KCG's trading architecture" in an effort to create processes and technology that can make marginal businesses profitable.
Even with the closing of the corporate bond business, Coleman expects the non-U.S. equities business to generate higher revenue in 2017. He said the expectation for higher revenue is partly dependent on the operating environment and noted that higher interest rates should help.
But he added that revenue growth from non-U.S. equities market making was not completely dependent on the environment. Coleman said he was optimistic that investments the company has made in Europe and the U.S. would pay off in 2017 "even if the environment is unchanged."