Q & A with Thomas M. Joyce

Q: What is Knight’s strategy for delivering steady growth amid constantly shifting market conditions?

A: We’re working to achieve consistent high performance that is sustainable as market conditions fluctuate. Knight’s growth strategy is based, in part, on diversifying revenues across clients, asset classes and geographies. In order to capture an ever-greater share of client order flow, we work diligently to provide meaningful insights and attain the best execution possible. In addition, we continually develop and deploy algorithmic principal trading models across asset classes. While market conditions swung dramatically in the past few years, we recorded 18 straight quarters of profitability in continuing operations, which reflects the successful execution to date of the growth strategy.

Q: To what do you attribute the market share gains in U.S. equities in 2009?

A: The primary drivers included the deepening of relationships with major clients, continued growth of the institutional client group and expansion of electronic trading capabilities. In addition, in the immediate aftermath of the financial crisis, the larger firms on Wall Street scaled back activity and clients re-evaluated broker relationships and counterparties. Knight remained fully engaged and, as a partial result, we emerged as a leading source of liquidity. In 2009, Knight gained market share in U.S. equities across Listed (NYSE), NASDAQ, Bulletin Boards and ETFs.

Q: What drove the extraordinary growth of institutional fixed income?

A: Given the credit crisis and resulting disruption among the larger firms on Wall Street, we moved aggressively to add staff globally across research, sales and trading. Headcount rose from 59 at the time of the Libertas acquisition in July 2008 to 175 at the close of 2009. In the process, we expanded product coverage, gained new clients and significantly grew notional dollar value traded. While the larger firms are currently regrouping, Knight now possesses a global platform for institutions across equities, fixed income and foreign exchange that rivals the larger firms in size and reach.

Q: How is the expansion in Europe and the Asia-Pacific region progressing?

A: Knight developed a successful approach to trading in the highly competitive U.S. capital markets and we have a lot to offer current and prospective clients in Europe and Asia-Pac. A reorientation of the European equities markets under MIFID presented an opening to expand our presence and help firms deal with liquidity fragmentation. In Asia-Pac, the challenge is fundamental as we build the firm’s profile among institutions. Despite a global decline in institutional commissions last year, we are generally encouraged with the progress to date.

Q: What explains the divergence between revenues and pre-tax earnings in 2009?

A: The astonishing revenue growth we recorded, in mixed market conditions of higher volumes and lower volatility, is evidence the corporate growth strategy is working. The rise is the result of market share gains in equities, fixed income and foreign exchange against the larger firms, electronic trading platforms and boutiques as well as increased contributions from algorithmic principal trading models. Pre-tax earnings decreased year-over-year due to a host of factors. We witnessed a confluence of events that included increased trading in low-priced stocks, higher regulatory transaction fees and a rise in clearing and execution fees. We invested in execution quality amid renewed competition and experienced a slight shift as revenue contributions from traditional sales and trading activities rose. Finally, we invested in new initiatives at a rate nearly triple that of the previous year.

Q: How do you balance strategic investment and cost control?

A: We manage the firm to deliver top line and bottom line growth consistently with a view toward long term, superior performance. Investments in new initiatives, including acquisitions and organic developments, are central to expanding the client offering and driving financial performance. When evaluating potential new initiatives, we consider the strategic fit, size of the opportunity and projected time to achieve a return on investment. Last year, despite considerable investments in new initiatives, we met the minimum management goal of 20% consolidated pre-tax margins. Over time, we expect margins to improve as the initiatives become operational and generate profits.

Q: What is the strategic position Knight is working to occupy in the marketplace?

A: Going back to Knight’s founding in 1995, we methodically built a strong reputation as a leading market-maker providing online broker-dealers with high-quality executions in U.S. equities. To diversify the firm’s offering, we added agency-based trading for institutions, expanded asset classes and began building a global presence, to cite a few broad initiatives. In the process, we evolved from a one-dimensional equities execution venue into a more rounded financial services firm. We want to be a strategic partner to clients seeking customized best execution for trades of all types, sizes and instruments. I believe we are successfully expanding what Knight has to offer and elevating the firm’s reputation within the industry.

Q: What is the regulatory outlook in the U.S. and how is Knight likely to be impacted?

A: The SEC is currently reviewing a number of market structure issues. Knight fully supports the effort by the SEC to look at the capital markets holistically and garner a deeper understanding of the market structure issues. The U.S. capital markets draw strength from competition, innovation and regulation. We urge the SEC to carefully analyze empirical data in connection with its review. We are confident the data show that the U.S. equities markets are the most liquid, efficient and fair in the world. Today, retail investors enjoy the highest execution quality and lowest commission costs than at any previous point in the history of the U.S. capital markets. Should the SEC adopt new rules, we will incorporate the new requirements into our firm’s trade process.

Q: What is the most enduring lesson from the financial crisis for Knight?

A: The roots of the financial crisis lay in too much leverage and inadequate risk controls which produced liquidity crises at several firms. On a more basic level, I believe firms that put their own interests ahead of their clients’ interests only court trouble. We certainly saw evidence of that come to light during the financial crisis. In the aftermath, I have little doubt Knight’s client-focused model accounted for a certain percentage of the market share gains we recorded in equities and fixed income.

Q: Why should one consider becoming a shareholder in Knight?

A: I believe we are one of a handful of firms that emerged stronger from the financial crisis. We demonstrated an ability to gain market share against the larger firms on Wall Street and remained profitable as market conditions swung dramatically. As a firm, we continued to invest in new initiatives – largely self-financed through free cash flow – during a period in which the majority of our competitors retrenched. I’m extremely proud of what we accomplished given the state of the broader global economy and have every confidence we can achieve and sustain profitable growth.

Q: What is the purpose of the recent bond offering?

A: Knight opted to issue $325 million in convertible bonds as a tool to more effectively manage equity and debt as part of the firm’s overall capital structure. Knight used the proceeds to retire a $140 million credit facility. The funds will also further the development of initiatives including self clearing, institutional fixed income, global expansion, options market-making, capital markets and general corporate purposes.