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The deal comes at a difficult time for high-frequency trading as low volatility squeezes the profits it can make from rapid-fire trades.
Virtu's offer of $20 per share represents a 12.7 percent premium to KCG's Wednesday close.
Shares of KCG hit a record high of $19.73 in early trading on Thursday, while shares of Virtu were up about 8 percent.
"KCG fits perfectly with Virtu's strategic priorities to apply our market making and technological expertise to customer wholesale order flow and expand Virtu's growing agency execution business," Virtu Chief Executive Douglas Cifu said in a statement.
KCG was formed in December 2012 from the merger of New Jersey-based Knight Capital Group — a pioneer of electronic market making — and Chicago-based Getco.
Virtu makes markets in 36 countries and 12,000 financial instruments, continuously quoting buy and sell prices for others to trade against, profiting off the bid-offer spread, using high-frequency trading (HFT) strategies.
HFTs use sophisticated technology and algorithms to trade stocks and other assets at near-light speed and are responsible for around half of the volume in U.S. equities and Treasuries, and nearly that in spot foreign exchange.
Virtu said it expects to migrate trading of the combined company onto a single platform.
The deal will be financed through stock sale worth $750 million to private equity firm North Island and Temasek and borrowings of $1.65 billion from JPMorgan Securities.
The combined company will be led by Cifu. Robert Greifeld and Glenn Hutchins, principals at North Island, will join the board after the deal.
KCG also reported an 88 percent fall in first-quarter profit, hurt by low market volatility.
The transaction is expected to close in the third quarter after approval from KCG shareholders and regulators.
JPMorgan Securities was the lead financial adviser to Virtu, while KCG was advised by Goldman Sachs.
CORRECTION: This article has been updated to clarify that borrowings from JPMorgan will be
$1.65 billion not $125 million, and stock worth $750 million not $625 million will be
sold to North Island and Temasek.