|NOVEMBER 18, 1999|
|Knight/Trimark Group, Inc. Enters Options Market With Acquisition of Arbitrade Holdings LLC|
Knight Aims to Be World's Number One Options Market Maker
Through Application of Proven, Wholesale Market Making Business Model
Transaction Is Expected to Be Immediately Accretive to Earnings
JERSEY CITY, N.J., Nov. 18 /PRNewswire/ -- Knight/Trimark Group, Inc. (Nasdaq: NITE), the largest wholesale market maker in U.S. equity securities, today announced its acquisition of Arbitrade Holdings LLC, a technologically advanced options market maker and asset manager, with operations in the U.S. and Europe. The transaction marks Knight's entrance into the options market and another step in the firm's efforts to diversify its revenue stream and expand its product offerings. Knight expects to invest up to $100 million over the next two years to fuel its long-term goal of becoming the top options market maker in the U.S. and abroad.
"The options industry is on the cusp of a transformation even more pronounced than the one experienced in the equities market earlier this decade," said Kenneth D. Pasternak, President and Chief Executive Officer of Knight/Trimark Group. "Once again, the variables at play are regulatory change, integration of technological advances and the rising importance of self-directed investors and resulting volume increases. We see a compelling need in the options market for the customer-driven focus, scale, technological prowess and reliance on human capital inherent in Knight's proven business model."
"Knight plans to create new standards for speed, liquidity and best execution in the options market," continued Pasternak. "As these standards approach those we have set in the equities market, there will be a tremendous boom in the use of options by the self-directed retail investor. Just as Knight's very creation was a harbinger of the on-line investor revolution, our acquisition of Arbitrade will be a watershed event for the options industry."
Knight and Arbitrade have come together because of a shared vision for the options industry and a common belief in the attributes required to be a top, electronic-age options market maker. Both firms have built their businesses on advanced trading methodologies and a dedication to human capital and technological innovation. Knight's new options market-making business unit, Knight Financial Products, will be headed by Arbitrade's Chief Executive Officer Peter Hajas.
"As part of Knight, we will have the opportunity to lead the revolution of the U.S. options industry," said Peter Hajas, CEO of Arbitrade. "We also plan to leverage our combined expertise in electronic-based trading platforms to establish a sizable presence in Europe and Asia -- two regions that have already embraced electronic options trading."
The combined entity, which will offer on-line brokers, broker-dealers and institutional investors a "one-stop shop" for processing options and stock transactions, will capitalize on economies of both scale and scope. Arbitrade's advanced technological expertise combined with Knight's existing platform will serve as a strategic asset across all product lines. Knight expects to save several million dollars each year by internalizing the equities market-making activities necessary to hedge Arbitrade's options positions. The combined entities also will apply the best practices developed by Knight and Arbitrade in their proprietary trading and risk arbitrage methodologies, respectively.
These synergies, enhanced by Knight's established equities market making track record, will assist in the strong growth of options order flow. This transaction is expected to be accretive to earnings immediately upon closing of the transaction and is intended to be accounted for as a pooling of interests. In addition, Knight sees growth opportunities for Arbitrade's asset management business, which has $350 million in assets under management. This business leverages Arbitrade's significant trading expertise for institutional investors and high net worth individuals, including Arbitrade's owners.
Knight's acquisition of Arbitrade, which was approved by Knight's Board of Directors on November 17, is expected to close in the first quarter of 2000. The owners of Arbitrade have approved the transaction as well. The closing of this transaction is contingent on customary conditions, including regulatory approvals. Knight/Trimark Group is being advised by Robertson Stephens and Arbitrade Holdings is being advised by Goldman Sachs.
The transaction will result in a newly formed parent holding company, which will issue shares on a tax-free basis to holders of Knight common stock and to the owners of Arbitrade. The Knight shares will be exchanged on a one-for-one basis while the Arbitrade owners will receive a variable number of shares based on the market price of Knight common stock prior to the closing. If the average closing price of Knight common stock for the 10 trading days ending on the third trading day prior to the closing of the transaction is within a $23.45 to $35.175 collar, Arbitrade's owners will receive shares with a total market value of $370 million. The minimum number of shares to be issued to Arbitrade's owners above the upper end of the collar is 10.5 million shares (approximately 8.6 percent shares outstanding immediately following the transaction), while the maximum number of shares to be issued to Arbitrade's owners below the lower end of the collar is 15.8 million shares (approximately 12.4 percent of shares outstanding immediately following the transaction). Based on the closing price of Knight common stock on November 17, 1999, the value of the shares that would be issued to the Arbitrade owners is approximately $459 million. Following the transactions, Knight and Arbitrade will become subsidiaries of the new parent holding company. Upon completion of the merger, the new parent holding company will assume the name "Knight/Trimark Group, Inc." and will become the publicly traded NASDAQ company (NITE).
Arbitrade Holdings LLC, founded in 1995 by Irv Kessler and Efi Gildor on the proposition that technology can improve profitability and reduce risk in the options market-making business, is a global market maker in exchange-traded derivatives. The firm actively makes markets in options on individual equities, equity indices, fixed income instruments and certain commodities in the U.S. Through its U.K. brokerage subsidiary, Arbitrade makes markets in options on individual equities and equity indices in Europe. Arbitrade also maintains an asset management business for institutional investors and high net worth individuals through its Deephaven subsidiary. Arbitrade employs approximately 190 people worldwide with offices in Minnetonka, Minn. (headquarters); Chicago, Ill.; White Plains and New York, N.Y.; Santa Clara, Calif.; and London, England.
Knight/Trimark Group, the parent company of Knight Securities and Trimark Securities, is the largest wholesale market maker in U.S. equity securities. Knight Securities makes markets in over 7,500 equity securities listed on Nasdaq and the OTC Bulletin Board of the NASD. Trimark Securities trades NYSE- and AMEX- listed equity securities over the counter -- the Third Market. The firm has executed over 55 billion shares in U.S. equity securities for the first nine months of 1999, a volume second only to Nasdaq and the NYSE. The four-year-old Knight/Trimark, as the largest destination for on-line trade executions, is the unseen "processing power" behind the explosive growth in on-line securities trading and has been selected to the "Fortune e-50" stock index. The firm employs more than 600 people worldwide with offices in Jersey City, N.J.; Jericho and Purchase, N.Y.; Chicago, Ill.; Boston, Mass.; and London, England.
Definition of Options
Equity options are derivatives. Derivatives are financial instruments that derive their value from underlying assets, indices, reference rates or a combination of these variables. Other types of equity derivatives include futures, forwards, convertibles and swaps.
The global equity options market consists primarily of standardized exchange-listed products traded on electronic and open-outcry exchanges worldwide. The market also includes customized, over-the-counter products created by major financial institutions for their customers.
Currently, equity options in the United States are primarily listed and traded on open-outcry exchanges. However, there is a worldwide trend toward the use of electronic-based trading platforms in the options market. The majority of options exchanges in Europe and Asia are completely electronic.
Although the large equity options exchanges in the U.S. (e.g., Chicago Board Options Exchange and Philadelphia Stock Exchange) remain open-outcry, some are adopting electronic trading mechanisms. In addition, the International Securities Exchange (ISE), a new U.S.-based exchange, expects to begin fully electronic equity options trading in the first quarter of 2000.
Options Market Participants
Participants in the options market are classified as either customers or dealers. Customers include financial institutions, commercial firms, mutual and pension funds, private investment funds and retail investors. Dealers include market makers such as large banks, securities firms and other market professionals.
Dealers and customers generally utilize equity options to offset their equity securities positions. This provides both groups an opportunity to harness market volatility and manage risk.
Role of Options Market Makers
As a market maker, Arbitrade meets customer demand by buying options when retail or institutional customers want to sell, and selling options when they want to buy. If Arbitrade is not able to match options orders automatically, the firm will provide liquidity by committing its own capital and trading on a proprietary basis.
Arbitrade's Value Proposition
Arbitrade focuses on select areas of the financial marketplace where the firm uses its strengths in analytics and technology-driven trading systems to create a competitive advantage in proprietary trading and market making activities. The intelligence of Arbitrade's systems is embodied in computational models of aspects of the markets and state-of-the-art nonlinear optimization methods. Arbitrade combines this intelligence with proprietary communications protocols, multithreaded and distributed processing, and agent-based decision-making to create real-time, fault-tolerant, highly automated trading systems. With these systems, Arbitrade can sweep a large universe of securities to capture a large number of small and fleeting but statistically significant trading opportunities, providing liquidity while making profits at relatively low risk.
Copies of this press release and other information on the Company can be obtained via the Internet at http://www.knight-sec.com or toll-free on the Company's investor information line at 1-877-INFO-NITE.
The matters described herein contain forward-looking statements that are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve a number of risks, uncertainties or other factors beyond the Company's control, which could cause actual results to differ materially from historical results, performance or other expectations and from any opinions or statements expressed with respect to future periods. These factors include, but are not limited to, the Company's ability to implement its growth strategies, economic, political and market conditions and fluctuations, government and industry regulation, interest rate risk, intellectual property rights, and other factors detailed in the Company's registration statement and periodic reports filed with the Securities and Exchange Commission.
SOURCE Knight/Trimark Group, Inc.