Knight Capital Group Analyst & Investor Meeting. November 2, 2006

Transcription

1 Knight Capital Group Analyst & Investor Meeting November 2, 2006

2 Welcome Margaret E. Wyrwas

3 Safe Harbor & Regulation G Safe Harbor Certain statements contained in this presentation, including without limitation, those containing the words believes, intends, expects, anticipates and words of similar import, may constitute forward-looking statements as defined in the Private Securities Litigation Reform Act of These forward-looking statements are not historical facts and are based on current expectations, estimates and projections about the Company s industry, management s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, viewers are cautioned that any such forward-looking statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict including, without limitation, risks associated with the costs and integration, performance and operation of businesses recently acquired by the Company and the risks associated with the future relationships of the Deephaven managers with Deephaven. Since such statements involve risks and uncertainties, the actual results and performance of the Company may turn out to be materially different from the results expressed or implied by such forward-looking statements. Given these uncertainties, viewers are cautioned not to place undue reliance on such forward-looking statements. Unless otherwise required by law, the Company also disclaims any obligation to update its view of any such risks or uncertainties or to announce publicly the result of any revisions to the forward-looking statements made in this presentation. Viewers should carefully review the risks and uncertainties detailed in the Company's Annual Report on Form 10-K and in other reports or documents the Company files from time to time with the Securities and Exchange Commission, including, without limitation, under such headings as Risk Factors and Certain Factors Affecting Results of Operations which appear in the "Management s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) section in the Company's Annual Report on Form 10-K and in other reports or documents the Company files from time to time with the Securities and Exchange Commission. This presentation should also be analyzed in conjunction with the Company s Consolidated Financial Statements and the Notes thereto contained in the Company s Annual Report on Form 10-K and in other reports or documents the Company files from time to time with the Securities and Exchange Commission. Regulation G In an effort to provide investors with additional information regarding the Company's results as determined by generally accepted accounting principles (GAAP), the Company also discloses certain non-gaap information which management believes provides useful information to investors. Within this presentation, the Company has disclosed its pre-tax operating income (loss) amounts for certain reporting periods before charges, writedowns, lease loss accruals and discontinued operations to assist the viewer in understanding the impact of these charges, writedowns, lease loss accruals and discontinued operations on the Company's financial results, which management believes will facilitate more useful period-toperiod comparisons of the Company's businesses.

4 Agenda Welcome Margaret E. Wyrwas 2006 Highlights Thomas M. Joyce Overview Broker-Dealer Institutional Asset Management Financial Update James P. Smyth Gregory C. Voetsch Thomas M. Joyce John B. Howard Outlook & Closing Remarks Thomas M. Joyce Question & Answer Session

5 2006 Highlights Thomas M. Joyce

6 Guiding Principle Knight is a single solution with multiple access points for investing in multiple asset classes

7 2006 Highlights Global Markets Launched new products Fine-tuned automation and ongoing improvements Achieved profitable organic growth Asset Management Increased assets under management Delivered strong returns Diversified offering Enhanced infrastructure Corporate Initiatives Launched corporate brand platform Integrated Hotspot FX Implemented Equity Incentive Plan

8 2006 Highlights: New Products Acquisitions Hotspot FX foreign exchange ECN ValuBond broker-dealer fixed income platform Enhancements Knight Direct direct market access Knight Match crossing network Direct Edge ECN International Market Access Leveraged Platform & Liquidity Pool Interactive order flow arrangements Exhaust interaction Packaging algorithms Team Hire Knight Capital Partners

9 2006 Highlights: Knight s Performance Since Increasing Automation Pre-Tax Operating Income ($ millions) (5.0) (15.0) Q1 '05 Q2 '05 Q3 '05 Q4 '05 Q1 '06 Q2 '06 Q3 '06 Global Markets Asset Management Corporate Consolidated

10 (50) 2006 Highlights: Global Markets Results of Operations Q1 '05 Q2 '05 Q3 '05 Q4 '05 Q1 '06 Q3 '06 Q2 '06 Global Markets Revenues Global Markets Pre-Tax Operating Income Total Revenue/Pre-Tax Operating Income ($ millions)

11 2006 Highlights: Asset Management 4,000.0 AUM ($ millions) 3, , , , , , , ,340.2 Blended Returns: 2004: 6.5% 2005: 7.2% YTD 9/30/06: 14.6% 1, , , Dec 2004 Dec 2005 Sept 2006 Market Neutral Fund Stand Alone Strategy Funds

12 2006 Highlights: Technology The Principle of Five 9 s % Uptime Downtime 90% 95% 99% 99.9% 99.99% % 876 hours (36.5 days) 438 hours (18.25 days) 87.6 hours (3.65 days) 8.76 hours minutes minutes

13 Global Markets: Broker-Dealer Overview James P. Smyth

14 Global Markets: Broker-Dealer Turnaround Market Makers Automation Nasdaq Listed <10% <10% YTD 9/30/ % 80%

15 Global Markets: Broker-Dealer Market Environment Scaled Market and Knight Volumes Average Daily Dollar Volume (in $ Billions) Jan- 05 Feb- 05 Mar- 05 Apr- 05 May- 05 Jun- 05 Jul-05 Aug- 05 Sep- 05 Oct- 05 Nov- 05 Dec- 05 Jan- 06 Feb- 06 Mar- 06 Apr- 06 May- 06 Jun- 06 Jul-06 Aug- 06 Sep- 06 Nasdaq Average Daily $ Value NYSE Average Daily $ Value Source: SIA.com website

16 Global Markets: Broker-Dealer Challenges 2006 Balancing profitability and market share Competitive pricing pressure Listed trading platform migration

17 Global Markets: Broker-Dealer Accomplishments 2006 Year-over-year profitable growth Successful order flow profitability analysis Improved models and algorithms New organization and team Nasdaq and listed trading management combined Closer relationship between cash and electronic trading Senior relationship managers and client service desk New products created additional revenue opportunities

18 Global Markets: Broker-Dealer Execution Quality Nasdaq 100 Execution Quality* January 2005 vs. October 2006 Effective/Quoted How much better is the execution price than the market (the lower the ratio, the better) Execution Speed Speaks for itself Price Improvement How many shares are executed at prices better than the market January % 2.3 seconds 24.0% October** % 0.4 seconds 52.5% At or Better Percentage of orders completely executed equal to or better than the market 89.1% 91.5% *Transaction Auditing Group, Inc. (TAG) & Market Systems, Inc. (MSI) **Nasdaq 100 calculations through October 23, 2006.

19 Global Markets: Broker-Dealer SWOT Analysis Internal Execution quality Strengths Model combines electronic and human trading Connectivity and flexibility Client service Valuable intellectual property Weaknesses Increased dependence on automation Profitability impacted by market volumes and volatility Variable cost economics largely outside our control ECN fees, SEC fees, TAF fee, compression Lack of captive order flow External Opportunities Regulation NMS and hybrid market Leveraging algorithms New products Threats Uncertain regulatory / market structure environment Further consolidation in retail brokerage sector Pressure on profitability through increased rebates and increasing execution quality

20 Global Markets: Broker-Dealer Key Initiatives 2007 Manage our offering to balance profitability vs. market share Leverage our algorithms Capitalize on implementation of Regulation NMS and Listed Hybrid Integrate ValuBond Cross-sell

21 Global Markets: Direct Edge ECN 2006 Accomplishments Developed a stable, fast and high volume infrastructure Reached 100 million shares Added outbound routing Introduced listed trading Competitive pricing Expanded order types 2007 Initiatives Achieve consistent profitability Grow broker-dealer client base Capture OTC and listed market share Volume target of 200 million shares Establish access to dark books Expand trading hours Add market participants

22 Global Markets: Broker-Dealer Leadership Position Market making and trading in more than 16,000 equities Natural liquidity Customizable trade executions Superior client service Market leader in OTC and listed securities Unrivaled broker-dealer network

23 Global Markets: Institutional Overview Gregory C. Voetsch

24 Global Markets: Institutional Growth Revenues (U.S. and international fullservice) Number of Clients Sales Traders Market Ranking Listed OTC Nasdaq/Listed split Products 2002 $100 million /58 14/47 98% / 2% 2 YTD 9/30/06 $186 million /53* 8/39* 70% / 30% 16 * Knight s ranking out of total U.S. firms reporting institutional commissions to a third party industry source Report as of 6/30/06

25 Global Markets: Institutional Challenges 2006 Lackluster institutional trading activity Increased competition for commission dollars from low-touch offerings Industry-wide commission pressure Penetration of key accounts with execution-only offering

26 Global Markets: Institutional Accomplishments 2006 Continued growth in market share Growth of international business Acquired electronic foreign exchange business Enhanced Knight Match with institutional crossing Focused cross-selling effort Ralph Acampora named all-star analyst by Institutional Investor

27 Global Markets: Institutional SWOT Analysis Internal Strengths Coverage in all domestic equities Execution-only model Top-tier client service with capital commitment Highly experienced sales, sales trading and trading personnel with deep client relationships Suite of low-touch electronic offerings Weaknesses No fundamental research or banking product No prime brokerage offering Limited derivatives trading capabilities External Opportunities Bulge bracket firms focused on top 50 accounts Large number of U.S. institutions without fullservice coverage Institutions consolidating broker lists Unbundling of commissions Threats Economic cycle impact on institutional allocation to equities Competition from crossing and algorithmic trading Prime broker-owned direct market access offerings

28 Global Markets: Institutional Key Initiatives 2007 Expand account base Cross-sell to penetrate and extend product offering into existing accounts Grow usage of Knight Match platform Invest in sales trading and trading personnel Increase commission sharing arrangements

29 Global Markets: Knight Direct Key Initiatives 2007 Migrate existing clients to Knight Direct platform Cross-sell into full-service accounts Provide flexible and functionally rich platform Grow futures and options business Provide access to international equities and foreign exchange

30 Global Markets: Hotspot FX Key Initiatives 2007 Grow institutional business on Hotspot FXi platform Integrate foreign exchange into Knight s platform Add foreign exchange capabilities to Knight Direct Cross-sell to equities clients Develop functionality in forwards and options

31 Asset Management Overview Thomas M. Joyce

32 Asset Management: Growth & Performance 2006 Growth in AUM vs. Quarterly Returns January 2005 through September % 4, , % 3,600.0 Blended Quarterly Returns 6% 4% 2% 3, , , , ,600.0 AUM (in $ millions) 0% 2,400.0 Q1 '05 Q2 '05 Q3 '05 Q4 '05 Q1 '06 Q2 '06 Q3 '06 2, % Blended Quarterly Return Ending AUM 2,000.0

33 Asset Management: Investment Strategy Expansion Future Global Multi-Strategy Global Multi-Strategy Global Multi-Strategy Global Event-Driven Global Event-Driven European Credit-Driven European Credit-Driven Global Convertibles Global Convertibles Global Value Partners Global Value Partners Funds Potential Funds Asian Multi-Strategy International Volatility Global Relative Value Macro

34 Asset Management: Challenges & Accomplishments 2006 Challenges Migration of Fund of Fund investors away from multi-strategy to single strategy funds Difficulty hiring in Asia Accomplishments YTD AUM growth of 30+% Out-performance in key products relative to peers Multi-strategy Event Registration as Investment Advisor Additional depth on Event, Credit and Asian desks Key hires on Business Development Team Launch of multi-strategy credit product, Global Value Partners

35 Asset Management: SWOT Analysis Internal Strengths Quality people New additions to business management have upgraded ability to continue to scale Globally integrated teams Presence as a top-tier hedge fund and reputation for sustainability YTD, six-, twelve- and eighteen-month rolling performance competitive vs. peers Opportunities Weaknesses Product/revenue mix dominated by two products Decline of global risk premium has reduced the opportunity set Threats External Growth in % of pension/endowment allocation to alternative investments International growth Launch new single-strategy funds Congressional & regulatory environment Competition for human capital Fund of fund investors continued movement away from multi-strategy product offerings

36 Asset Management: Key Initiatives 2007 Build Global Relative Value Macro Team Expand Asia Build Global Long/Short Innovate and introduce other strategies Increase assets under management Launch new products Improve recruiting and retention

37 Financial Update John B. Howard

38 (5.0) (15.0) Actual Pre-Tax Operating Income: Q1 '05 Q2 '05 Q3 '05 Q4 '05 Q1 '06 Q2 '06 Q3 '06 Global Markets Asset Management Corporate Consolidated Pre-Tax Operating Income ($ millions)

39 Global Markets: Impact of Dollar Value Traded Volumes , , , , ,000 Dollar Value Traded ($ millions) - Q1 '05 Q2 '05 Q3 '05 Q4 '05 Q1 '06 Q2 '06 Q3 '06 100,000 (50) - Global Markets Revenues Global Markets Pre-Tax Operating Income Dollar Value Traded

40 Global Markets: Pre-Tax Operating Margins 35% 30% Q3 '06 Q2 '06 Q1 '06 Q4 '05 Q3 '05 Q2 '05 Q1 ' Total Revenue/Pre-Tax Operating Income ($ millions) (50) Pre-Tax Operating Margins 25% 20% 15% 10% 5% 0% -5% Global Markets Revenues Global Markets Pre-Tax Operating Income Pre-Tax Operating Margins

41 Global Markets: Annual Metrics 9 mos Revenues ($M) Pre-tax Operating Earnings ($M) Pre-tax Margins 13% 10% 26%

42 Global Markets: Revenue Capture Q1 Q2 Q3 9 mos. Revenue Capture Overview U.S. Core Equity Revenues* ($M) Total U.S. Equity Dollar Value Traded ($B) 1,731 1, ,536 Average Revenue Capture per Dollar Value Traded (bps) * Core Equity Revenues consists of Net Trading Revenues, Commission Equivalents and Commissions * Core Equity Revenues primarily consist of Net Domestic Trading Revenues, U.S. Institutional Commissions and Commission Equivalents. Core Equity Revenues do not include revenues from the European institutional business, Donaldson, Direct Trading, Direct Edge and Hotspot.

43 Asset Management: Overview 9 mos Revenues ($M) Pre-tax Operating Earnings ($M) Pre-tax Margins 38% 30% 35% Average AUM ($M) 2,964 3,291 3,166 Blended Return to Investor 6.5% 7.2% 14.6%

44 Corporate Segment: Overview 9 mos. ($M) Revenue from Corporate Investment in Deephaven Funds Average Corporate Investment in Deephaven Funds Revenues from Strategic Investments and other Corporate Income Corporate Overhead Expenses

45 Consolidated Pre-Tax Operating Margins Consolidated Pre-Tax Operating Margins % % (11% excluding gains on strategic investments) YTD % (26% excluding gains on strategic investments) Expense Trends Employee compensation 34-37% of revenues Execution and clearance 14-16% of revenues Rebates / soft dollars 14-16% of revenues All other operating expenses $25-30 million per quarter

46 Strong Financial Condition Balance Sheet as of 9/30/2006 Cash of $187 million Corporate investment in Deephaven Funds of $203 million Investment of 343,000 shares in ISE Stockholders equity of $955 million Book value per diluted share of $8.97 Stock Repurchase Program $166 million remaining under this program Repurchased 39.6 million shares for $329 million since inception of program

47 Outlook & Closing Remarks Thomas M. Joyce

48 Revenue Diversification: 2002 to YTD 9/30/06 Commissions and fees Net trading revenue Commissions and fees Net trading revenue Asset management fees Interest and dividends, net Asset management fees Interest and dividends, net Investment income and other Investment income and other 2002 YTD 9/30/06

49 Our Four-Year Evolution At Knight, trading is not a commodity. It is a science. Knight is a leading financial services firm that provides comprehensive trade execution solutions and asset management services. We continually apply knowledge and innovation to the trading and asset management processes to build lasting client partnerships through consistent performance and superior client service. Our Asset Management business, Deephaven Capital Management, is a global multi-strategy alternative investment manager focused on delivering attractive riskadjusted returns with low correlation to the broader markets for institutions and private clients. Our Global Markets business provides a broad range of customized trade execution products and services across multiple asset classes for broker-dealers, institutions and issuer companies.

50 2007 Key Initiatives Leverage automation efforts New products Reg NMS/listed hybrid Diversify and expand offering Asset classes and market access Horizontal growth (electronic and voice) Cross-sell Direct Edge ECN Hotspot FXi Knight Direct Knight Match ValuBond Expand and diversify Asset Management Performance against benchmarks New products Asset growth Geographic footprint Add $25-50 million to pre-tax through accretive acquisitions New fee-based revenue streams New asset classes leveraging financial technologies Continue to buy back stock

51 Virtual Exchange Liquidity Buy-Side Sell-Side Liquidity

52 Virtual Exchange Access, Asset Classes, Connectivity Buy-Side Sell-Side Instant Access Electronic Direct Edge ECN Hotspot FXi Knight Direct Knight Match ValuBond Voice Institutional Block Trading Institutional Sales Trading International Market Access Program Trading Special Situations Connectivity Liquidity Asset Classes Equities Fixed Income Foreign Exchange Options Futures

53 Virtual Exchange Products & Services Buy-Side Instant Access Sell-Side Execution Quality & Service Broker- Dealer Products & Services Client Commission Programs Electronic Direct Edge ECN Hotspot FXi Knight Direct Knight Match ValuBond Voice Institutional Block Trading Institutional Sales Trading International Market Access Program Trading Special Situations Companies Connectivity Client Support Portfolio Financing* Relationships Corporate Access Corporate Services Liquidity Asset Classes Equities Fixed Income Foreign Exchange Options Futures Private Placement Capital Placement Research Technical Mutual Fund Cash Management* *Unaffiliated companies that provide outsourced solutions

54 Opportunities Industry Catalysts Market downturn Unbundling of commissions Regulation NMS and MiFID Buy-side empowerment Growth Drivers Voice relationships Electronic access Trading software applications Cross-selling

55 Differentiators Knight is known for Relationship focus Intellectual capital Liquidity Knight will be recognized for its uniqueness as Top-five institutional voice network on the Street Exchange-like infrastructure with scale and capacity Broker-dealer connectivity with a natural pool of deep liquidity Electronic access across asset classes Trading software applications leveraged into client offerings

56 Questions & Answers

57 Knight Capital Group Analyst & Investor Meeting

58 Appendix

59 Reconciliation of GAAP Income to Non-GAAP Operating Income 9 Months ending September 30, 2006 Global Markets Asset Management Corporate Consolidated Income from continuing operations before income taxes $ 125 $ 48 $ 12 $ 185 Writedown of assets and lease loss accrual Pre-Tax Operating Income $ 134 $ 48 $ 12 $ Global Markets Asset Management Corporate Consolidated Income from continuing operations before income taxes $ 35 $ 21 $ 49 $ 105 Writedown of assets and lease loss accrual Regulatory charges and related matters Pre-Tax Operating Income $ 45 $ 27 $ 49 $ Global Markets Asset Management Corporate Consolidated (Loss) income from continuing operations before income taxes $ (13) $ 30 $ (17) $ (0) Writedown of assets and lease loss accrual 4 4 Regulatory charges and related matters Pre-Tax Operating Income (Loss) $ 70 $ 30 $ (17) $ 83