Citigroup Buys Knight's Derivatives Unit for $225M

Citigroup Inc. (C) on Monday said it will buy Knight Trading Group Inc.'s (NITE) derivative markets business for $225 million to expand its market-making abilities in options.

The transaction follows Citigroup's announcement last month that it agreed to buy Lava Trading Inc. (search), a technology company that develops trading infrastructure programs, for an undisclosed sum.

For Knight — a leading trader of Nasdaq stocks that has struggled with regulatory investigations and months of weak stock trading volumes — the sale will allow it to focus on its equity-trading and asset-management businesses.

The deal also doubles the $223.6 million in cash and cash equivalents Knight held as of June 30. Knight, based in Jersey City, N.J., entered the derivatives business in 2000.

Citigroup's purchase includes the operations of two units, Knight Financial Products LLC and Knight Execution Partners LLC, the companies said.

As a result of the agreement, Citigroup said it will gain electronic and floor-based market making capabilities in fixed income options and options for stocks listed on the New York Stock Exchange (search).

New York-based Citigroup, the world's largest financial services company, is also buying Knight's membership rights on the International Securities Exchange, the world's largest equity-options exchange, though Knight will retain its equity investment in that exchange.

Reflecting its focus on the derivatives business, Citigroup recently became an electronic specialist on the Chicago Board of Options Exchange (CBOE (search)).

"Management concluded that Knight's strongest growth opportunities remain in our equity markets and asset management businesses, and that derivative markets has a better opportunity to reach its full potential as part of a larger company," said Thomas Joyce, Knight's chief executive.

The purchase is expected to close in the fourth quarter, subject to antitrust and regulatory approvals.

Separately, Knight said it increased the size of its share repurchase program to $250 million from $110 million.

Raymond James & Assocs. and the law firm Skadden, Arps, Slate, Meagher & Flom LLP advised Knight on the transaction.

Knight shares closed Friday at $8.29 on Nasdaq, not far above their 52-week low of $8.06 touched last month. Citigroup shares closed Friday at $43.19 on the New York Stock Exchange, not far above their year low of $42.55 set late last August.