[ by Larry Goldfarb ]

Knight Capital Group's board on Tuesday agreed to sell the equities market-making firm to Getco Holding Company LLC.  The Board chose the Getco bid because 

• Its value, even considering the combined cash / stock nature of the offer vs the all cash bid from Virtu, had the greater value
• Getco's financial health seem to be superior to that of Virtu

Knight, which executes options and stock trades for other brokerage firms, had been in negotiations with Getco and Virtu Financial LLC, high-frequency trading firms that often compete with clients of Knight. Knight executes about 10 percent of U.S. equity trading volume, making it a vital cog in the stock trading system.

Chicago-based Getco increased the amount of cash in its cash-and-stock offer to around $2 billion, or more than $3.60 a share, helped by an infusion from private equity General Atlantic, its principal investor.  Virtu had boosted its all-cash bid to $3.20 a share, a source said, leaving Knight's board to weigh the value of cash against what stock in a newly combined Getco-Knight would be worth. Knight shares closed on the New York Stock Exchange Tuesday up 2.1 percent at $3.33.

Knight's directors were divided not only over value but over the future management and financial health of the company, sources said. Under Getco's proposal, Knight Chief Executive Thomas Joyce will step down from those roles.  Under Getco's initial proposal, Joyce would serve as nonexecutive chairman of the combined company while Getco CEO Daniel Coleman would run the firm day to day.

Both Getco and Virtu coveted Knight's U.S. market-making business, which uses computer models to match buy and sell orders in stocks and options. Knight's market-making has remained profitable despite a market-wide slump in equities volume, though its profits have been eroded by ventures into other areas.  Getco and Virtu have market-making units that compete against Knight.

The latest discussions started after Getco made an unsolicited bid late last month for Knight, which was followed by Virtu's bid, which was also unsolicited. 

For more information, please read [CNBC, 12/19/12].