Knight a king of liquidity

Three executives visit Israel to explain how Knight Capital’s systems and liquidity are best for trading Israeli shares on Wall Street.

By YAEL GRUNTMAN / GLOBES
March 12, 2011 23:42
4 minute read.
Benjamin Netanyahu

Bibi netanyahu. (photo credit: JPost Staff)

Knight Capital Group Inc. is the largest wholesale market maker in US equity securities, with 19,000 stocks to its credit.

Knight provides trade-execution services to 2,700 banks, financial institutions, brokers and other customers around the world, including in Israel.

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Three Knight Capital executives recently visited Israel and spoke with Globes. Two of the executives are Israeli: managing director for institutional sales Moti Ifergan and China-based Tal Harpanas. They were joined by Joe Wald, who is responsible for the specialized technology that focuses on algorithm- based trading strategies and developing software for direct access to markets.

The three were in Israel for marathon meetings with banks and local institutional investors.

Knight is a leader in ADR (American Depository Receipt) trading, with 17 percent of the market. The company also operates intensively in European and Asian markets.

“The declared objective of the current visit to Israel is widening and deepening the operations that have existed for about the past 10 years with Israeli financial institutions,” Ifergan said. “This will allow veteran and new institutions, including leading banks and Israeli institutional investors, to receive brokerage services in foreign securities at a different level, through a significant improvement in results that they will be able to present to their end customers.”

“The Israeli market and its leading players have a wonderful reputation around the world, and there is no reason that they should not get the leading brokerage services in the world,” he said.

Knight’s ability to offer the highest level of liquidity in the market, together with specialized algorithm-based technology whose compatibility with market conditions and customer demands occupies 50 programmers, are what allow it to reach optimal execution that saves customers lots of money.

“Knight’s systems know how to deal with large orders that customers feed into the company’s algorithm-based trading systems,” Wald said, “and they are broken up into smaller quantities whose execution is matched with market conditions at any given time, and they drag out for a while: that way we avoid unnecessary volatility in security pricing, and you avoid exposing the position of the customer.”

“The cost of a securities transaction is made up of external cost, which is the fee, and internal cost, which is connected to the quality of the execution,” he said.

“Brokers are measured today by customers on the degree of slippage, or in other words, how much the price of the security will move as a result of the buy- or sellorder flow.”

Knight operates with transparency, the executives said.

Due to systems that identify the optimal opportunities, Knight’s average slippage is less than five cents for every dollar traded, compared with an average of $0.15- $.40 among its competitors, they said.

“The savings goes straight to the customer, reduces transaction costs and contributes to improved returns – a central factor for institutional players in the market, who try with all their might to beat the market and provide better returns than competitors’ for customers,” Ifergan said.

Multiplying the cost difference by the number of transactions carried out daily by Knight results in a huge number, the executives said.

That points to the effectiveness of execution that attracts professional clients to Knight from across the global capital markets, including banks, mutual funds, hedge funds, provident funds and pension funds, they said.

Recent years have seen a development of off-floor trading, and today about 15% of securities trading is carried out through “dark pool” activity, where large trades take place offexchange, so that the volume doesn’t work against investors. There are about 30 dark pools in the US, alongside the established exchanges, which are also increasing in number.

The exchanges have expanded beyond the wellknown ones such as Nasdaq or the New York Stock Exchange. Knight operates in all of them, so the broker is able to increase returns for customers while maintaining anonymity.

Knight’s leadership in ADR trading is very relevant to investors who are interested in trading shares of Israeli companies on Wall Street, where most Israeli companies trade as ADRs, the executives said. Many of them have low trading volume, and many investors are prevented from investing in them to avoid getting stuck with inventory when they want to exit a position, which would result in driving the share price down.

“Knight has the ability to supply much more liquidity than the supply or demand listed on the screens,” Ifergan said. “If investors want to buy or sell a block of shares... without moving the market too much, apparently we’re the ones who can help them do it in the best way.”


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