Knight Capital Group (NITE) makes money buying and selling huge volumes of stocks -- 9.2 billion shares a day in 2009 -- on behalf of itself and others. As a market maker, the Jersey City, N.J., firm makes sure buyers and sellers of more than 19,000 stocks have someone to take the other side of their trades. On these transactions, it earns the difference between the bid (buy) and offer (sell) price. It also earns commissions for helping big institutional players execute large and complex trades. Although most of its business is in stocks, it also trades bonds, futures, options and currencies in various markets.
Marketwide trading volume has a big impact on Knight’s success, and it was lower than expected in late 2009. Combined with lower average profitability per trade, that sent the shares plunging from a peak of $23 in October to $15.60. Many of the causes were temporary, such as a higher proportion of low-priced (and lower-profit) stocks in the mix.
Looking beyond short-term ups and downs, Knight, the largest U.S. market maker, is well positioned to capitalize on continued global growth in securities trading. It has a successful track record of growing through acquisitions and a solid balance sheet, which will help finance new purchases. Knight’s executives believe they can produce 18% annual revenue growth over the next five years and operating profit margins of 20% or better. That sounds pretty good for a stock that trades for less than ten times expected 2010 earnings of $1.60 per share.
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