Knight avoids collapse with $400 million lifeline

By Christina Rexrode

Associated Press

Published: Monday, Aug. 6 2012 12:00 a.m. MDT

Specialist Peter Giacchi looks at the price of Knight at his post on the floor of the New York Stock Exchange, Wednesday, Aug. 1, 2012. Traders' attention was diverted to unusually sharp moves in a number of stocks shortly after the opening bell. The New York Stock Exchange says it is reviewing trades in 140 stocks. Trading volume was unusually high in the first half-hour of trading, and some investors suspected technical glitches.

Richard Drew, Associated Press

Enlarge photo»

NEW YORK — Knight Capital Group, the trading firm responsible for last week's stock market mayhem, avoided collapse by lining up a $400 million lifeline from a group of other Wall Street companies Monday morning.

But the money comes at a steep price.

Knight says it will get the cash infusion from an investor group led by Jefferies Group, as well as Blackstone, Getco, Stephens, Stifel Nicolaus and TD Ameritrade. In exchange, the group will receive stock that can be converted to a 73 percent stake in Knight, which means Knight is essentially handing over control to the investor group. Knight will also add three directors to its board.

Knight's stock has mostly been in free-fall since a massive computer error in its systems last Wednesday sent huge numbers of erroneous orders flooding into the market, causing dozens of stocks to swing wildly in heavy volume. Knight said the foul-up would cost the firm $440 million as it paid for stock positions it mistakenly bought. Early Monday Knight's stock took another pounding, dropping 25 percent, or $1.01, to $3.02. It closed last Tuesday at $10.33.

Knight's CEO Thomas Joyce, speaking in an interview on CNBC, said that only Knight, and not its clients, were hurt by Wednesday's snafu.

"This was an isolated situation," Joyce said. "We screwed up. We paid the price."

Joyce said his firm was still doing a post-mortem on the technical blunder and still didn't have a full understanding of what went wrong. He characterized the error as a "large" but "simple" breakdown on trading technology.

Knight Capital, based in Jersey City, N.J., is a trading firm that takes orders from big brokers like TD Ameritrade and E-Trade. It then routes them to the exchanges where stocks are traded, like the New York Stock Exchange.

Even with the cash infusion, it's not yet clear that Knight will regain the trust of other key players in the stock market to carry on and survive as a firm. Last week some of Knight's trading partners said they would suspend routing trades through them until the situation settles.

One of the roles Knight plays in the stock market is that of a "designated market maker." Those firms are responsible for keeping trading of the stocks they oversee orderly. They are viewed as particularly important during the open and close of trading, as well as during times when there is a lot of volatility in the market.

Ten minutes before stock trading opened Monday morning, the New York Stock Exchange issued a press release saying it was temporarily reassigning Knight's responsibilities of trading 524 NYSE-listed stocks to Getco, a rival firm and also one of Knight's new owners.

In another troubling sign of financial market malfunction, trading on Madrid's stock exchange was suspended for five hours Monday because of a technical glitch. An exchange spokesman didn't provide any further details. Spain's stock market has been in turmoil for months as the country's banking system teeters on the brink of collapse following the implosion of a real estate bubble there. Spain's benchmark Ibex-35 index surged 4.4 percent Monday, its latest gigantic swing.

Knight's blunder has been a disaster for the firm's current investors. The value of the company's stock is now down 70 percent from Tuesday, the day before the blunder occurred. By issuing more shares, the value of what's held by current investors is diluted among more shareholders. It also means the company's earnings are spread among a greater number of shares.

When a public company sells such a big portion of itself, it's usually required to ask shareholders for their permission first. But the New York Stock Exchange granted Knight an exception, after Knight's board determined that waiting for a vote "would seriously jeopardize the financial viability of Knight," the company said in a news release.

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