Two of the largest independent U.S. high-frequency-trading firms
are in early merger discussions, as a downturn in trading
opportunities has spurred cutbacks and tie-up talks among
rivals.
RGM Advisors LLC and Allston Trading LLC have discussed a deal
that would combine their respective strengths in automated stock
trading and futures markets, according to people close to the
talks.
New technologies have fueled a surge in computer-driven,
rapid-fire trading over the past decade, boosting the profile of
independent, proprietary "prop shops" that trade for their own
benefit, while also prompting big banks to embrace high-frequency
techniques.
High-frequency traders use sophisticated hardware and
mathematical models to rapidly buy and sell securities and other
instruments on exchanges around the world, pocketing profits on
often-tiny shifts in prices.
While fast trading benefited from the opportunities churned up
by the market volatility of 2008 and 2009, a downturn in volumes on
both sides of the Atlantic since then has squeezed profits, spurred
cutbacks and set the stage for industry consolidation. Meanwhile,
regulators are drawing up tighter restrictions on automated-trading
practices, and some trading venues are clamping down on high-speed
dealing.
The potential combination of Austin, Texas-based RGM and
Chicago-based Allston could create a more-diversified trading group
with lower expenses. A deal could encourage other traders to pursue
tie-ups as a way to diversify their businesses and spread the costs
of monitoring risks and connecting to exchanges.
Discussions are at an early stage, according to people with
knowledge of the talks. The discussions could end with no deal,
these people said.
"From time to time, as interesting partnership opportunities
emerge or as we identify acquisition opportunities, Allston
management will of course consider them if they accelerate our
growth objectives but will not comment on any of those discussions
unless there is something concrete to communicate," said Allston
Chief Executive Raj Mahajan in a statement.
Richard Gorelick, CEO of RGM, said in a statement his firm
doesn't publicly comment on speculation about potential deals. "We
are focused on continuing to grow our business in a variety of
ways," he said.
Jefferies Group LLC is advising Allston, while RGM hasn't
retained a bank in the discussions, according to people familiar
with the talks.
The two privately held firms are major customers of the New York
Stock Exchange and futures platforms operated by CME Group Inc.
(CME), and a deal would extend a string of tie-ups as electronic
traders combine or consider selling out to better-capitalized
rivals.
Automated traders' push to trade more assets across more markets
has slowed as firms have cut jobs and operations to stay
competitive with a growing number of competitors pursuing
electronic strategies. Chicago-based trading groups including
Getco, Sun Holdings LLC and Infinium Capital Management LLC have
shed staff and named new chief executives who are seen open to
expansion through deal-making.
Getco LLC, a big high-frequency market maker, has acquired
several smaller firms and in December agreed to buy Jersey
City-based Knight Capital Group Inc. after that firm was hobbled by
faulty trading software.
"The dialogues have picked up post-Knight," said Chris Malo,
chief financial officer of Sun. "We're in accelerated growth mode,
both organically and inorganically."
Private firms' tendency to closely guard their trading methods,
even in talks with potential partners, has been a hurdle to
deal-making, however. "It's very difficult to get two firms to get
comfortable with one another," said Jeff Bell, chief executive of
Lime Brokerage LLC, which provides technology to electronic
traders.
U.S. stock-trading volumes have declined in each of the past
three years and this year are running 35% below the industry's peak
in 2009, when an average 9.8 billion shares changed hands a day,
according to Sandler O'Neill + Partners. Activity on U.S. futures
exchanges this year has rebounded from a slower 2012, but it has
waxed and waned since the 2008 financial crisis.
"High-frequency trading in general is a volume business," said
Robert Stowsky, a senior analyst with Aite Group, a Boston-based
firm that researches electronic trading. "If trading volumes are
going down, that means it's tougher for prop shops to make
money."
The slowdown has forced some high-speed specialists to leave the
business. One notable casualty was Eladian Partners LLC, a venture
founded by former Citigroup Inc. (C) trading executives and backed
by private-equity firm Technology Crossover Ventures. Eladian
closed in October after TCV opted not to add to its investment,
people familiar with the matter have said.
RGM was founded in 2001 and uses complex computer models to
place opportunistic trades, mainly on U.S. and European stock
markets. The firm employs about 130 staff in Austin and London and
is seen complementing Allston's specialty in providing liquidity to
futures markets. Allston, which was founded in 2003, has about 150
employees in Chicago and London.
Both firms have hired staff in recent months, and Mr. Mahajan
said Allston is pursuing a strategy to double the firm's net
trading revenue.
Write to Jacob Bunge at jacob.bunge@wsj.com
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