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KCG Holdings, Inc. (NYSE:KCG)

Q1 2014 Results Earnings Conference Call

May 2, 2014 9:00 AM ET

Executives

Daniel Coleman - Chief Executive Officer

Steve Bisgay - Chief Financial Officer

John McCarthy - General Counsel and Head, Regulatory Affairs

Jon Mairs - Managing Director, Investor Relations

Analysts

Rich Repetto - Sandler O’Neill

Niamh Alexander - KBW

Chris Harris - Wells Fargo

Chris Allen - Evercore

Ken Worthington - JP Morgan

Patrick O'Shaughnessy - Raymond James

Operator

Please standby. Good morning. And welcome to KCG’s First Quarter Earnings Conference Call. As a reminder, today’s call is being recorded and will be available by playback. On the line are Chief Executive Officer, Daniel Coleman; and Chief Financial Officer, Steve Bisgay; and General Counsel and Head of Regulatory Affairs, John McCarthy. A question-and-answer session will follow remarks on the quarter.

To begin, I’ll turn the call over to Jon Mairs, Managing Director of Investor Relations. Please go ahead.

Jon Mairs

Thank you. Good morning. I am Jonathan Mairs. Welcome to KCG’s first quarter 2014 earnings call. Before we begin, please direct your attention to cautionary terms regarding forward-looking statements in today’s discussion, certain statements contained herein, and the documents incorporated by reference may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In addition, take a minute to read the Safe Habor statement contained in the earnings per share, which is incorporated herein by reference.

In terms of the agenda for the call, Dan will open with a few remarks. Steve will provide details on the quarter including financials. Dan will return with a few addition comments before we take questions.

Now I’ll turn the line over to Daniel.

Daniel Coleman

Thanks, John, and good morning, everyone. The first quarter of 2014 is only our third quarter of the new firm. As I’ve mentioned on previous calls, we are focusing on what we can control, we are focusing on taking cost out of the business through integrated platforms and processes, we are focusing on creating KCG.

For the third quarter in a row, I believe we have made progress on this front. What differentiates the first quarter of 2014 from the fourth quarter last year is a significantly improved environment that positively impacted some of our businesses.

In the first quarter, KCG recorded a 23% quarter-on-quarter increase in net revenues. Our direct-to-client Market Making posted a very strong quarter. As of April 15th, KCG fully repaid the first lien term loan, which gets us out from under the more restrictive debt covenants.

And finally, the KCG Board of Directors authorized $150 million share repurchase program. The people of KCG have been working very hard over the past year laying the foundation of our new firm.

This quarter we've been able to show tangible progress on many fronts and notably the potential of our business model under beneficial market circumstances and yet, I fully recognize there is still work to do to optimize our performance and more evenly balanced the contribution from our businesses and Market Making, as well as in Global Execution Services.

Over the past month we have been closely watching the elevated discussion of market structure issues and actively communicating with clients, policymakers and our employees to help clarify the facts.

While we like many others in our industry were frustrated with irresponsible characterizations of the equity marketplace, we encouraged that the deeper and more informed analysis of the issues is now taking place.

I'll touch on those issues in depth in a minute, but first, Steve, will run through additional details on the quarter.

Steve Bisgay

Thank you, Daniel, and good morning, everyone. As a recap, during the first quarter of 2014 KCG's GAAP pre-tax earnings from continuing operations were $59.4 million, stripping out nonrecurring revenue in the form of the income related to the BATS and Direct Edge merger, as well as the written down of capitalized debt cost during the quarter, operating pre-tax income was approximately $57.6 million.

A brief note, during the first quarter, KCG began a session charges for debt interest to the Market Making and Global Execution Services segments based on capital limits and requirements. Historically, the charges were contained in the Corporate and Other segments. The change has no impact on consolidated results.

We have broken out the respective charges to the segments in the press release and the discussions of segment results to allow for comparisons to previous quarters. The change will only be reported prospectively and therefore will not be reflected in any prior period financial results.

Getting into the segments, first, Market Making. During the first quarter, KCG's Market Making segment generated revenues of $277.3 million and pre-tax earnings of approximately $76 million. The debt interest charge for the quarter was $7.2 million.

The Market Making segment encompasses all direct-to-client and exchange-based Market Making across asset classes. The revenues and pre-tax earnings, inclusive of the debt interest charge grew 19% and 59%, respectively, from the fourth quarter of 2013.

Results were primarily driven by direct-to-client Market Making in U.S. equities as retail investors were fairly engaged during the first quarter. Overall, retail trading activity as measured by total SEC Rule 605 eligible orders handled by the leading market makers rose an estimated 9% quarter-on-quarter.

KSG executed a greater number of retail shares across exchange listed and OTC stocks than any other market makers. Our average daily shares traded of exchange listed stocks increased 3.5% from the fourth quarter, while daily volume of OTC stocks rose 228%.

Total average daily dollar volume rose 2.8% quarter-on-quarter. Market condition generally had a positive impact on exchange-based Market Making as did continuing efforts to integrate, test and refine strategies.

Revenue capture for U.S. equity dollar volume traded in the first quarter was 1.26 basis points. Driving the strong result was the increase in consolidated U.S. equity volume, intermittent periods of heightened volatility, the performance of our order execution models, a slightly higher rate of internalization and greater efficiencies due to scale.

As a result of strong revenue capture and total U.S. equity dollar volume traded during the quarter of $1.67 trillion, revenues from U.S. equity Market Making were approximately $210 million for the quarter. Revenues from Market Making activity outside U.S. equities of approximately $67.3 million were essentially flat quarter-on-quarter.

Direct-to-client Market Making in European equities was positively impacted by rise in broad European equity market volumes quarter-on-quarter and in fact, the continued growth of trade volumes in U.S. treasuries was offset in part by the sell-off in commodities.

Shifting over to Global Execution Services, during the quarter the segment generated revenues of $87.2 million and pre-tax income of $2 million. The debt interest charge for the quarter was $2.4 million.

The Global Excretion Services segment comprises agency execution services and trading venues. Revenues grew 4% from the fourth quarter 2013 and the segments going to profit inclusive of the debt interest charge.

The results were achieved through balance contributions across a number of business units with demonstrable progress from recent initiatives, institutional equities is a good example.

We received the full quarters benefit from adjustments that we made to the cost structure and closer coordination on sales to strategic accounts. In addition, we saw modest uptick in institutional trading activity.

KCG institutional sales trading in the U.S. and U.K. posted increase revenues and decrease expenses quarter-on-quarter. Our algorithmic and EMS executions set a quarterly record for average daily volume of U.S. equity shares traded of 281 million shares, a 9.7% increase quarter-on-quarter.

During the quarter, we rolled out a new opportunistic algorithm appears high test systems and logic created by KCG's Market Making team with parameter customization and broad market access recorded by our clients. We are also beta-test with client’s additional new intuitive algorithms that integrate the best of both legacy platforms.

During the first quarter, KCG’s trading venues continue to produce profitable growth. KCG Hotspot average notional FX dollar volume of $32.2 billion per day and 11.1% rise quarter-on-quarter and accounted for 14.1% of institutional spot FX volume among reporting venues. The team is working to drive continued growth by working with clients to develop specialized applications and methodologies that enhance trading.

KCG BondPoint grew average daily trade count and par value traded which was up 8.4% quarter-on-quarter to $144.2 million. Results were primarily driven by gains in market share to new record levels.

In the first quarter, KCG BondPoint accounted for 18.2% of interdealer corporate bond transactions under 250 bonds as reported by Trace and 5.8% of interdealer municipal bond transactions under 255 reported by the MSRB. The team continued expanding the platform to institutional clients and average daily trade account from this client base has more than doubled then the past year.

The KCG BondPoint team is currently focused on augmenting the platform to include capabilities and connectivity for institutional clients to OMC and EMS systems, and introducing new trading protocols for both broker-dealer and institutional clients.

Now a brief update on the Corporate and Other segment, during the first quarter, KCG received approximately $41 million in aggregate cash distributions from the merger between BATS and Direct Edge, all recorded as return on capital rather impacting our income statement.

Our high level discussion of the accounting treatment is contained in the press release issued this morning. Post-merger, KCG owns 16.7% of BATS which is now accounted for under the equity method.

Turning now to consolidated expenses, total expenses for the quarter were $316.5 million, excluding $7.8 million from the write-down of capitalized debt costs and lease loss accruals.

Compensation expense of $122.3 million in the first quarter was 45% of debt revenues. The increase in compensation from the fourth quarter is largely due to higher revenues, payroll taxes, 401(k) matching expenses, and two months of amortization expense from annual stock-based awards. We now define net revenues as total revenues less execution and clearing fees, payment for order flow and collateralized financing interest, as well as any one-time gains or losses from strategic investments. In the first quarter, net revenues were $270.3 million.

As for the other primary expenses during the quarter, execution and clearance fees were $75.5 million or 20% of revenues, excluding the net gain from BATS. The decline from the fourth quarter is related to higher revenue capture, internalization, sharing, and ECN usage. Communications and data processing was $36.8 million. Payment for order flow rose to $22 million or 6% of revenues, excluding the net gain from BATS. The increase in dollar amount is due to increased retail trading activity in U.S. equities and listed options.

Corporate debt interest decreased to $9.5 million as a result of the repayments to the first lien term loan during the quarter and collateralized financing interest, which is the interest expense incurred to finance our inventory, increased to $6.2 million during the quarter. Excluding nonrecurring charges disclosed in Reg-G reconciliations, all other expenses totaled $44.1 million, which was $4.7 million lower than the fourth quarter.

A quick update on the balance sheet. As stated, we intend to maintain a strong and liquid balance sheet. As of March 31, KCG has $651.1 million in cash and cash equivalents. Aggregate debt totaled $472.3 million and the firm’s debt-to-tangible equity ratio stood at 0.35. KCG had $1.6 billion in stockholder’s equity, a book value of $12.46 per share and a tangible book value $10.85 per share. Annualized return on tangible equity, excluding the net gain from BATS, was 10.8% for the quarter.

Following the early termination of the first lien credit facility on April 15, KCG's debt was reduced to roughly $423 million. As Daniel mentioned at the outset, KCG's Board of Directors authorized an initial $150 million share repurchase program. The program was sized equal to the maximum repurchases currently permitted under covenants contained in the second lien term notes. Finally, headcount as of March 31 was 1,230 full-time employees compared to 1,229 employees as of December 31.

That concludes our report for the quarter. Now, I’ll turn it back over to Daniel.

Daniel Coleman

Thanks, Steve. As I said at the outset, we had a solid quarter. Operationally, we are ahead of schedule and integrating many of our core capabilities. Financially, we’re nearing our target cost structure and also demonstrating our earnings power. Over the past month however, the sector has come under intense scrutiny regarding market structure in what has become an emotionally charged debate. I am sure many of you have questions around the market structure issues in the news and their impact on KCG and I want to proactively address them

In a letter to our clients just last week, we agreed with SEC Chair, Mary Jo White’s assessment the U.S. equity markets are by no means rigged, and in fact, among the strongest and most reliable in the world. That said, our markets can always be improved and here are few areas we think should be reviewed, markets in our fee structures, ATS disclosure, market data latency, and market maker obligations. Both KCG predecessor firms supported the concept of market maker obligations. This is because our firms were both market makers. We were and still are intermediaries that bridge the temporal gap between supply and demand for buyers and sellers. The better we are at our job, the lower the transaction cost for our investors become, which ultimately means more of an investors’ money goes into their investment.

The level of competition amongst intermediaries is intense and investors are the direct beneficiaries of that competition. I anticipate that many of those listening on the call might wonder about potential implications of regulatory change on our business. While I won't speculate about rules that have not yet been written much less proposed, I will tell you this, the intermediary service we provide is existed in markets for hundreds of years. It’s a critical service that both our clients and our regulators value. Our relationships with our clients are long-standing and based on us delivering on that value proposition.

We are extremely confident in our ability to adapt and adjust our service models necessary in order to continue to fulfill our Market Making role. So when thinking about the various what-ifs involved with potential regulatory change, it is important to note that while the details and mechanics around what we could have changed, the fundamental role we play in the markets will not. Indeed, all indications are that an appreciation of the unique role of market makers in our market’s ecosystem is only growing.

As I said, while it is impossible to anticipate what rules or other policy changes maybe on the horizon, it is clear that the SEC is focused on market structure issues related to high frequency trading, such as co-location, exchange fee structures, order type, and data feeds. And as one of the largest U.S. equity trading firms, we're providing the SEC information as part of their recently announced HFT market review.

We will continue to engage in work with regulators around these important issues and I've been heartened by the fact based data-driven approach the SEC has taken and promoted. Again no market is perfect. The U.S. equity market can be improved while retaining the significant benefits of the existing framework. The regulatory goal of fostering competition has also fostered complexity and that needs to be addressed. But as we contemplate change, we must also use empirical data, look at market interaction holistically, and be mindful of the potential implications of our decisions.

The U.S. equity markets are among the best in the world. Let's make sure any contemplated change only improves them. Thank you again for making the time this morning. And at this point, we will take questions.

Question-and-Answer Session

Operator

(Operator Instructions) We will go first to Rich Repetto with Sandler O’Neill.

Rich Repetto - Sandler O’Neill

Good morning, Dan. Good morning, Steve. And congrats on the strong quarter. I guess the first question, the revenue capture this quarter of 1.26 bps. Historically, Knight would guide to 0.8 to 1.2. And I'm just trying to see whether the guidance range is still good going forward or does the model where you've combined GETCO and Knight, should we look at this 1.26 as more sustainable and can you update that range?

Daniel Coleman

Okay. Hey, Rich, 1.26 I think reflects a very strong quarter and very strong market conditions. As we are putting our firm together, we are going get a closer handle over time as to what this capture rate should be, but I think this really reflects the market conditions and the traditionally Knight business called ETG and their performance. So while I don’t want to give guidance, I would see this as a very strong number, and perhaps a number that would be toward the high end of the range. This includes I think some of the performance relates to strong pinks and bulletin board business as well as a very strong just general retail order flow. So I would love to see it repeated, but I think the market conditions in any case were much better than we’ve seen in the last few quarters.

Rich Repetto - Sandler O’Neill

Okay, that's helpful. And then I guess, Dan or Steve, just an update on the expenses you had -- well just trying to see what the outlook for more expense reductions over 2014. Is there any update there? Any more clarifications now that you have another, what is it, 90 days to look at this?

Daniel Coleman

On the expense reduction we are very pleased where we’ve gotten to thus far. At the end of last year and in this year, and excluding interest and contra revenues and clearing fees and things like that, our core non-personnel expenses I think are at a run rate that I would expect to be around this run rate this year. That doesn’t mean they are not going to come down next year. What that means is, we’ve taken the low-handing fruit when it comes to non-personnel expenses, and I think we’ve moved on that or acted on that.

Now we are in the process of combining technologies, really changing processes, and a lot of the work we are doing now is going to take all of 2014. And I am very hopeful that next year you will see further non-personnel expense reductions because of the work we are doing this year and getting to an expense level that I think would be really competitive advantage of our. So we are very happy where we are now. I don't expect significant non-personnel expense reductions this year. We are very, very focused on expense reductions and I think the work we do this year will see some improvements next year.

Rich Repetto - Sandler O’Neill

Okay. And then the very last quick one, just the buyback, you're trading below tangible book value. Could you just comment on sort of the -- you paid down the debt and followed the plan, just how aggressive you might be on the buyback given where the stock is trading?

Daniel Coleman

Well, we are three quarters old and we want to be very careful and deliberate with decisions like this. This is within our covenants. We feel very comfortable that we are not. We can use this with the cash at hand and capital we free up and we are going to be very focused on trying to return this to our shareholders as quickly as we can, but we don't have a timeframe limit on it. We think it’s a significant buyback. But we also think it’s a buyback that’s well within our means without changing our leverage in anyway.

Rich Repetto - Sandler O’Neill

Understood. And thanks. Congrats on the strong quarter guys.

Daniel Coleman

Thank you, Rich.

Operator

Next, we will go to Niamh Alexander with KBW.

Niamh Alexander - KBW

Thanks for taking my question and congrats on the quarter. And if I could go to the regulatory and thanks for your preemptive remarks on the regulatory environment and you said you are kind of already responding to the recent SEC kind of review of HFT as it were. And there is a few things and the price here. But the trade-at -- I mean, it's come up before but some of your online broker customers, they've kind of mentioned in passing in some of their calls that it could be potentially very negative for your business.

I know nobody has a look into what the SEC is up to right now in terms of if there's going to be a pilot or not, but help me think about what implications on your business if you ran a pilot or where would it be good. How might this change the level of internalization at your business, because you cited it as one of the reasons for the good rep capture as well as the higher retail flow in the first quarter?

Daniel Coleman

Well, I think it’s difficult to talk about a trade-at without knowing the intricacies of the rules. If we take a step back and talk about some of the things of the exchanges or some of the exchanges have promoted, I feel like that the rules they are looking for are very much in their commercial interests and not necessarily in the interest of the marketplace. I think if, as the SEC does a holistic review, I'm hopeful they'll look at the issues at hand which they want to deal with that sometimes trade that’s used is trying to fix such as price discovery and making sure they enhance then.

We think there are other ways they can do that, especially through market maker obligations and make a lot more sense, and do not decrease competition, do not decrease in a marketplace that an owner’s trade-at rule would. So it is hard for me to comment without knowing what significant price improvement would mean with respect to some proposals of trade-at. But we're a firm that's involved in the lit markets very much as well as training directly with clients. We are a firm that provides price discovery in the lit markets as well as innovative ways to help our clients out directly. So a significant trade-at rule obviously would have an impact, but it’s really hard to say at this point.

Niamh Alexander - KBW

Okay. Fair enough. And then just one other area that I guess was flagged in the book as well is the dark pools and you have two pretty big and successful ones. If again there were -- help me think about how that contributes to your -- I know you can't give it in numbers, but what way does that contribute to kind of boost your profit capture or your ability to capture shares, like if for example there were some significant limitations put on the dark pools that would capture yours as well?

Daniel Coleman

I don't think people understand how dark pools are viable to the firms like ours. It's a way for our clients to interact with each other in automated fashion. From a revenue point of view with us directly, it's not that material. But what it is, it’s a flexible way for clients to interact with each other where some clients might post bids and offers and other clients might come in through our algos and things like that. We also have obviously no Knight link, which is really not a dark pool but it's more a traditional market maker, which I don't think would be impacted by any dark pool regulatory issues.

But I think, for example, if you were to look at significant changes to dark pools, just to go after dark pools, I think that's probably not the right way to go for lot of our clients like to interact in dark pools. But there are clearly some things I think regulators should look at with respect to the complexity of the markets that are having 58 or so different venues to trade on. And little changes here and there can really decreased complexity without decreasing choice and innovation, and we'll have to see how the SEC comes out on all of this. The little changes can have big impacts. The U.S. equity market structure is a very delicate ecosystem and so, I imagine the SECs can be very deliberate as they make changes and see how they impact the markets.

Niamh Alexander - KBW

Okay. Thank you, Daniel. And then just lastly if I could just on the buyback and following up from Rich’s question earlier. Given how much you've put to work every day in the markets, like how much right now would you consider to be kind of excess cash that if you felt there was a big pullback in the stock and you do want to kind of go for it, how much is excess right now?

Daniel Coleman

I don’t think we disclose excess cash. And as a trader, I’ve never disclosed my trading strategies. But I will say that it’s important to demonstrate to our shareholders that we want to return cash to them, as we are working very hard to build out our operating businesses. Our shareholders have been patient with us and this is a way to reward them.

Niamh Alexander - KBW

Okay. Thanks so much.

Daniel Coleman

Thank you.

Operator

We’ll go next to Chris Harris with Wells Fargo.

Chris Harris - Wells Fargo

Thanks. Hey guys.

Daniel Coleman

Hey, Chris.

Chris Harris - Wells Fargo

So, a few questions about the business. Dan, you just mentioned that there is possibility for more expenses to potentially come out in 2015. Any way to kind of frame up for us how much that could potentially be and maybe sort of the timing associated with any of that?

Daniel Coleman

I don’t want to give guidance, but I would tell you the place to look would be comps and data, which is running a little under 150, annualize on this quarter. The work being done there, some of that will come to fruition next year. So that in and of itself is a big number relative to our overall expenses. But I don’t think we are prepared to give you complete guidance -- material guidance for next year. I just want people to understand that we think this year is that sort of an expense run rate that we are comfortable. But we still think there's opportunity to bring expenses down and we are working towards that for next year.

Chris Harris - Wells Fargo

Okay. Understood. And you highlighted a capture rate in Market Making and cited some of the reasons why this went up. Maybe if we could talk about the volume side of the equation a little bit, that was only up 3% quarter-on-quarter. Just wondering why that number isn't a little bit better, given some seasonality uplift you'd expect and it seemed more broadly that industry volumes were up. So just trying to reconcile that with what looked like to be a pretty good quarter for the industry from a volume perspective.

Daniel Coleman

I think every quarter, the dynamics of, especially wholesaling changes in this quarter, you saw that ETRADE and its order handling agreement, I think was implemented with Susquehanna. I think of some of our clients, one client particularly gave us less order flow this past quarter than we previously received. And another client has come on this quarter, giving us order flow than what they gave us in the previous quarter. So there's a dynamics in the wholesale space of big clients moving around adjusting that can impact order flow. I don't see a particular trend. I do think the ETRADE deal with Susquehanna obviously is a one-time impact. But I don't see a particular trend either way with our market share and our order flow. And as we all know, it’s very possible that the Schwab order flow will open up later this year, and that could be an opportunity to see another change in how the order flow dynamics work in the wholesale space.

Chris Harris - Wells Fargo

Are your prop volumes getting any better, I mean, excluding kind of the wholesale part of your business? I know you guys don't like to kind of break it all out like that, but is that part of your franchise getting any traction?

Daniel Coleman

Well, I think, we did break out the non-U.S. equity revenues, which is primarily on exchange traded outside the U.S. and in fixed income was flat quarter-on-quarter. I would say that we are still working on different parts of the business. Our FICC business do not have as good a quarters we would like. I think a lot of that had to do with market conditions and certain other parts of our business have done better than the previous quarter and certain haven’t. So, I would say, we are still working to improve that, I’m talking about revenues but they are correlated to market share in that business. So, I'd say it's sort of similar to Q4 and we are hopeful we can see a larger portion of our revenues there in the coming quarters.

Chris Harris - Wells Fargo

Okay. And then just a few quick ones on the market structure issues. Dan, you mentioned market incentive fees structures should potentially be reviewed. Which of these are you specifically talking about? Are you talking about market-make payment for order floor or are you talking about maker-taker, just maybe if you can clarify that a little bit?

Daniel Coleman

Yeah, I think while maker-taker, I think is well intended in some ways that it encourages -- encourages market makers to pose liquidity. It also creates potential conflicts in routing decisions and also creates confusion about what best execution is if you don't include what could be a reasonably large taker fee.

And so I think we should look at maker-taker and see how it's distorted our market structure especially when we have routing decisions and execution decisions. Often we don't take in consideration those fees. So that’s the main thing I would suggest that we look at its maker-taker fees.

Chris Harris - Wells Fargo

Okay. Interesting. And there seems to be some momentum around that. Lastly then, just kind of curious if you could help us understand what ways Knight as whole, excuse me, KCG, is that a competitive disadvantage following under the Market Making obligations that you guys have relative to perhaps some others that are in the trading business?

Daniel Coleman

Well we are market maker and I would suggest that, I mean, it is what we do. But I think as the market maker, we expose ourselves. We’re sitting out there on the bids and offer either on exchanges or directly to clients and because of that we get picked off. I mean people talk about speed and talk about a high frequency trading. I can assure you we get picked up probably more than any other firm in the world and that is the tough thing about being a market maker with or without obligations.

So I think as we look at our market in the in U.S. equities and in our other markets, I think it’s important to have posted liquidity and it's important to have a market that’s continuously trading. So you need people to continuously post liquidity but at the same time you have to keep a balance between firms that provide liquidity and firms that take liquidity and from time-to-time that balance is out of whack in different markets in different ways.

So not so much about the obligation itself but as the role of a real market maker that’s the biggest issue we face. And that’s why we focus on making sure we can be as effective as possible. Because at the end of the day, we want to provide markets to institutional clients and directly to our retail clients and yes we are out there in the public markets. But they are very smart people that are very fast and they do take advantage of markets we lay out there.

Chris Harris - Wells Fargo

Okay. Make sense. Thanks for taking all the questions.

Daniel Coleman

Thanks Chris.

Operator

We’ll go next to Chris Allen with Evercore.

Chris Allen - Evercore

Morning guys.

Steve Bisgay

Hey Chris.

Daniel Coleman

Good morning.

Chris Allen - Evercore

Just a couple of questions. Where do you guys stand from a capital front? I know you guys have been freeing up a lot of capital and using it to pay down the debt, but where do you stand right now in terms of what level of excess capital do you have?

Daniel Coleman

Do you want to take that, Steve?

Steve Bisgay

Yeah. Sure. We continue to have a sizable level of capital. We continue to have very conservative model, to be clear. We maintain -- we continue to maintain our capital buffer of about $275 million. We think that's closely aligned with our liquidity buffer.

We think that’s very important for number of reasons not least of which from credit analysis and the like as we are facing off with counterparties every single day. So we certainly do have some excess capital on top of that as well as Daniel mentioned but I think we’re in a very good shape from that perspective.

Chris Allen - Evercore

Any numbers on the amount of excess?

Steve Bisgay

Well, again, we have a buffer which could be deemed access of about $275 million. There is some access above that as well.

Chris Allen - Evercore

Got it. Okay. And then I mean just looking at my model thinking about moving forward, about $40 million in cash flow generation per quarter. I mean, just how do we think about -- I mean, how are you guys thinking about deploying that whether internally or returning capital moving forward?

Steve Bisgay

Well I think right now, I mean, we did announced $150 million buyback this morning. So I think that will be the first way we deploy it as within the excess cash. We look at either buying shares. At this point, we haven't discussed the dividend but obviously that's an alternative and also there is opportunities to deploy it in our current business or acquisitions. Right now I would suggest that the $150 million in the repurchases, how we are going -- we are deploying and then when that's done we'll have to review our other options.

Chris Allen - Evercore

Got it. And then you guys have talked before about overlaying GETCO algorithms with the traditional KCG retail order flow. I'm just wondering, have you been actively implementing that? Just kind of thinking about that, I mean I know that's typically thought of as lower capture rate models and then obviously we saw an incredible capture rate this quarter. So just wondering if those models were active already and even with those models, we had a high capture rate?

Steve Bisgay

I would suggest that those models are active but they didn't have anything to do with the high capture rate. So we’re getting some benefit there and hopefully get more benefit over time as we continue to tweak things. With the high capture rate, I think was really almost exclusively to do with the legacy Knight businesses in the environment. And so I wouldn't read too much. High capture rate doesn’t reflect revenue synergies of the merger.

Chris Allen - Evercore

Got it. Okay. And then just within Global Execution Services, revenues were up about 4% sequentially. I mean, all the indicators you guys give us in terms of Hotspot, BondPoint and Knight Direct were up 9% to 11%. How do we think about that relative to the revenue growth? Was it just lower institutional sales and trading driven revenues or is it just lower rates within those businesses?

Steve Bisgay

That’s a good question. I think institutional businesses perform pretty well quarter-over-quarter. So I would -- the ETF Business is still rebuilding but from a quarter-over-quarter point of view I think the difference shouldn’t be that material. So I don't think there's --we’ll have to get back to you because I don’t think we saw a margin compression in the businesses and we did see good performance.

So we’ll have to get back to you on the exact how we -- how those numbers come together. But the institutional business as a whole, both in Europe and the U.S. had pretty good quarters relative to fourth quarter.

Chris Allen - Evercore

And then just the last one for me. Execution and clearing fees as a percentage of trading revenues dropped about 20% versus roughly 24% the last two quarters. I know you guys had talked about that improving moving forward. I mean is this kind of a good level to think about moving forward, or is there obviously high -- decent volumes this quarter? Were there also some discount levels in there in the covenant?

Steve Bisgay

Sure. It’s Steve. Volumes played a part but I think the larger piece of that however is really the high revenue capture. That’s certainly had, I think a larger bearing on the overall, on the 20% versus 24% numbers that you are referring to. But it is a combination of high revenue capture, slightly greater internalization which is helpful. Trades were up a little bit. So we’re going to get some tiering benefits as well.

Chris Allen - Evercore

Thanks guys.

Daniel Coleman

Thanks Chris. Thank you.

Operator

(Operator Instructions) We’ll go next to Ken Worthington with JP Morgan.

Ken Worthington - JP Morgan

Hi. Good morning. In terms of the revenue capture, how should we think about the variability of it going forward as you kind of have and continue to bring in new strategies? I think the predecessor Knight had gotten to the point where, either due to coincidence or other reasons, a revenue capture that had grown over time to be reasonably stable and modelable. Would you think -- is there any reason for that variability to either increase or decrease, given the combination and integration of Knight and GETCO?

Daniel Coleman

Ken, I don’t think so. I think the vast, vast majority of this came from legacy Knight business doing what it’s always done and doing it very well. I think this is a capture number that was a little above the high end and may well in retrospect be above the high-end going forward, we just don't know.

We do think a lot of work has been on these businesses to continue to hone their models and make sure that they're doing the best job they can. And quite frankly I think we've rolled out things and continue to roll out things that improve our businesses. But the competitors do to. So it's hard to project what revenue capture would be by either our investments in our businesses or with respect to market conditions.

The best guidance to give you would be historical. Hopefully, overtime, revenue capture would be closer to this number. But I would look back over the history, just as you would and look at the standard deviation of that. And perhaps, we can continue with the revenue capture in which case we'll have to adjust. But I can’t -- I don't have ability give you a better guidance in that.

Ken Worthington - JP Morgan

Perfect. And then the pace of investment, so you've clearly stabilized the business. There's still some integration that's taking place. But as you think about growing the business and kind of fulfilling your longer-term plan, how should we see that? And can you talk about maybe the level of investment that you expect to make in terms of dollars to kind of grow the business?

And then in terms of the nature of that, is this really near term about filling in different capabilities which is like lift out based or is it you've got to really make bigger upfront costs because the investment involves new technologies and new offices and new other things which have I know a greater financial burden?

Daniel Coleman

That’s good question. I think we have a good strategy for what we do. We’re focused on a few business lines. We leverage technology everywhere and we want to be the leading market maker and liquid products around the world. We clearly have gaps from where we are now in that ambition.

On our investments spend in our businesses to not change significantly over the near-term, we’re very focused. We’re continuously focused on integration. I want to reiterate that we’re not through this yet. But as we integrate and bring technology together, processes together, we think, we’re making better than either firm had before.

So it is an investment in our business and building a new business. I think some of the things I talked about in the past are still very much true. I think we have a lot of opportunity in our algo business as we’re putting algos on to our new platform as we’re leveraging the sales traders and their relationships to penetrate asset managers.

I'm very excited about what's going on there and the reception we’re receiving. And a little bit of growth there can be a lot for us because it's a business. Especially asset management side, I feel like we’re under penetrated here in the U.S. and Europe. I still think your proposals are really good opportunity for us to build out execution only businesses, in particular with aggregators in Europe and we’re very focused on that. And recently have hired a new head of our European office will start in a few months.

There are other businesses that we think about in the long run that could be very interesting for us. We’re watching FX closely because we think the market structure there may well change over time as the regulators look at that market. And there are other businesses that fit our general game plan that might require a small hiring of the team here and there over the next couple years.

But right now, our plan is continue with our strategy. Our plan is our incremental growth will be things like BondPoint developing a bigger institutional presence. We’ll be penetrating asset managers more with our new algos in Knight Direct. And these incremental changes will matter. But from time to time, if there’s opportunities to grow product or geography that fits our strategy, I expect we will pursue those opportunities. But I don't see a mass amount of infrastructure spend or anything like that over and above what we regularly spent.

Ken Worthington - JP Morgan

Great. Thank you very much.

Daniel Coleman

You are welcome.

Operator

We’ll go to our last question from Patrick O'Shaughnessy with Raymond James.

Patrick O'Shaughnessy - Raymond James

Hey. Good morning, guys.

Daniel Coleman

Good morning.

Steve Bisgay

Good morning.

Patrick O'Shaughnessy - Raymond James

I wanted to, I guess, first, delve into a little bit more of your non-U.S. equities Market Making activities, so just kind of the legacy GETCO stuff. And you provided some comments on it? But I do want to kind of go a little bit further. So to what extent was the relative softness that you saw in those businesses, just due to kind of softer industry-wide volumes? How much of it was a function of market share and how much a function of revenue capture?

Daniel Coleman

I think, so quarter-on-quarter those businesses are flat and but individually they’re not. I think the market environment for rates type trading was pretty poor from a volatility point of view, not, maybe not in volume but a volatility point of view.

I also think commodities was not as buoyant as it was in Q4. So, those businesses are in there. There are -- Asia is a very dispersed business in different geographies where different countries will do different things and can have big impact from markets, whether it’s a market structure change in Japan or technology change in Korea or something else going on.

Asia has a very diverse portfolio of businesses that sometimes the revenue changes will not be as predictable due to market environment but rather market structure changes and we saw some of that with the change in the Japanese market structure, which I think, we've adapted to, but I think, it cost a little bit of blip, not material, but a little bit.

So, in general, looking at that business outside the U.S., I think the reason why we didn't see a better performance is, I think, the main reason are the commodities and fixed income environment was really worse in Q1 than even Q4 for our businesses and I think that our equities businesses in there were, okay. And U.S. equities business has exchange traded Market Making, I think, did a little bit better than the Q4.

Patrick O'Shaughnessy - Raymond James

Got you. That's helpful. And then, I guess, kind of longer-term bigger picture for your Market Making and these other asset classes? How should we think about the growth opportunity there? Is 2014 going to be kind of a bumpy year just because of pressure on commodities trading and maybe some lower volatility in rates trading? And then maybe kind of this line item starts to grow more aggressively in 2015 or what are your broad expectations for those non-U.S. equities Market Making businesses?

Daniel Coleman

Well, I wont say is bumpy, it’s a same revenue quarter-to-quarter, but I would say it’s disappointing. I think overtime, I would hope to grow the FICC businesses as the opportunities avail themselves. I would hope to we do have some businesses where we trade directly with clients in fixed income products. I think there is opportunity grows that around the world.

I think, when I look at low hanging fruit, I’ll still go back to the businesses I mentioned earlier, like algos and the growth in BondPoint, and in some other things that are very close to what we're doing now. But I do think FICC is a long-term opportunity for this firm, especially as market structure and the swaps business starts to evolve. I think that would fit nicely in with our on exchange rates trading.

So, I would expect that in this environment, we will perform similarly. Hopefully, we can improve on that. But I think long-term is really the important thing to think about because rates trading will not always be like the volatility that it has recently. And I think when QA’s is up and a few other things, I think it could be a very, very good business for everyone in it. But right now rates trading, it really is undergoing a lot of change, both with respect to the governments’ involvement and banks and how they trade them. And so I don't think that's helped to buy more volatility.

Patrick O'Shaughnessy - Raymond James

Okay. Appreciate that. Switching gears a little bit back to the U.S. equities. So they get matched volume that you guys report to a couple of different sources. It looks like it's dropped by about 70% over the past year. Is there something specific going on? Are you just trying to redirect people over to Knight Match? And in terms of where Knight Match and Get Match show up in your income statement, is that, I mean, Global Execution Services?

Daniel Coleman

There is a line in Global Execution Services. The revenue of ATS is very small. It's not a big number. There are just different ways for clients to interact. Get Match has always been a Market Making business where on the legacy GETCO and now we’re posting bids and offers and clients interact with us. But our traders don't know the client is dark to us. And it’s a very straightforward model. We also post algos in there as well. But the Knight Match is the bigger market venue.

It’s where clients interact with each other and it’s a venue that has -- the market structure is quite different. Get Match is more like Knight Lincoln some ways in that. It is us trading directly with clients. But I don’t there's a material impact on our business by Get Match getting a little bit smaller. And I do think that our Knight Match businesses is doing well and that really is more of a reflection, not that Knight Match is itself a business but our clients are enabled to interact with each other in ways they like to, in ways they feel adds value to them and that’s important to us.

Patrick O'Shaughnessy - Raymond James

Got you. That's helpful. And then one last one for me. I think that one of the key selling points of the merger between GETCO and Knight was kind of, the ability to cross-sell each other's capabilities and something you've talked about in the last two calls. Can you provide an update on how some of those cross-selling and the revenue synergies are coming along?

Daniel Coleman

I mean, I think the most important place is in the algo business. And I think we're getting a lot of traction with clients on our algos that either have come from GETCO or more importantly, algos were building out now with people of legacy GETCO and legacy Knight, ETG people and putting our best models, the best technology together on behalf of clients. We haven't seen a big revenue pickup. But if you know the algo Business, you get clients to adopt and then you get the traders to use and it takes a little bit of time. From my point you, that is the place where we’re going to see the biggest impact in 2014.

Patrick O'Shaughnessy - Raymond James

Okay. Great. Thank you.

Daniel Coleman

Thanks Patrick.

Operator

There are no further questions and that does conclude today's call. We thank you for your participation. Once again, that does conclude today’s call. We thank you for your participation.

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