Knight to Acquire Agency Brokerage EdgeTrade for FAN

FAN, the Find And Nail algorithm, created by agency brokerage EdgeTrade, has found a fan in Knight Capital Group.

EdgeTrade's development of FAN, which simultaneously sprays aggregated dark pools and public markets and continuously moves an order in line with shifting liquidity, has led to a lucrative courtship by Knight, a full service broker-dealer, which announced its intentions to acquire EdgeTrade this morning for $59.5 million.EdgeTrade's suite includes smart order execution, liquidity aggregation and participation strategies, as well as customized algorithms. The firm is well known for algos like FAN, Sumo and Covert.

On a call with press and analysts this morning, Knight Chairman and CEO Thomas Joyce said EdgeTrade was attractive because of its technology innovation and algorithms and spoke primarily of the wide and fast adoption of the FAN algorithm.

In his opening remarks Joyce noted that Knight's goal is to create a firm that supports alpha creation through varied services.

Knight has a hybrid model, using a combination of technology and voice services to support its over 2,000 clients. It owns ECN, DirectEdge; direct market access platform, Knight Direct; and also uses various algorithms, none of which have been developed internally.

Combining these services with EdgeTrade's, which focuses solely on electronic trading, via proprietary algorithms, Joyce believes will strengthen Knight's offerings and will help it to further rebrand Knight as "an organization that is embracing technology aggressively."

Joyce points out that approximately 94% of buy-side firms report using algorithms, up from 77% in 2006. Thus Knight wants to be positioned to offer algos to its clients now and in the future. For example, EdgeTrade's development capability will enable Knight to provide algos beyond domestic equities, in areas such as FX and futures, as well as for international equities.

When asked how the combination of the firms will set it apart from its competitors, Joyce said many firms offer similar services but the nuances help one stand apart from another. He credited FAN as one of these nuances. EdgeTrade was founded in 1996 by CEO Joe Wald and President Kyle Zasky.

One question that will likely come up as the two bring together their firms and cultures, is how does an agency brokerage that has continuously touted itself for being "unconflicted"-not trading for its own account-combine with a broker-dealer that does commit capital to clients? When asked, Joyce said the two will complement each other, He noted, "We do offer capital to execute, but we're not trading on our own account. We are not doing anything that is in conflict with the agency model."

It will be interesting to see how EdgeTrade's 220 clients react to the news. For now, Knight's clients have been nothing but pleased. Joyce says, "Clients have been emailing me, giving me the old 'Atta Boy.'"FAN, the Find And Nail algorithm, created by agency brokerage EdgeTrade, has found a fan in Knight Capital Group.

EdgeTrade's development of FAN, which simultaneously sprays aggregated dark pools and public markets and continuously moves an order in line with shifting liquidity, has led to a lucrative courtship by Knight, a full service broker-dealer, which announced its intentions to acquire EdgeTrade this morning for $59.5 million.