The investor group will receive 267 million shares that they'll be able to convert to common stock for $1.50 a share. The firm currently has about 98 million outstanding shares, according to FactSet.
The Wall Street Journal reported that Knight asked the Securities and Exchange Commission, the federal regulator that oversees businesses, for an exemption so it wouldn't have to buy back so many of the mistaken trades, but the SEC declined.
Knight's CEO, Joyce, confirmed on CNBC that he did speak to SEC chairwoman Mary Schapiro over the weekend. "We had a frank discussion, and she did what she thought was right for the industry," Joyce said.
The SEC does allow trading firms to cancel some erroneous trades, but it has gotten stricter about what qualifies ever since the notorious "flash crash" of May 2010, when another technical problem sent the Dow Jones industrial average plunging nearly 600 points in five minutes.
Joyce said he respected Schapiro's decision but added: "This was an error, by any definition this was an error, so we would have liked to see some more flexibility."
The trading disaster Knight caused has revived a thorny debate in the financial system about the merits of high-speed trading, where lightning-fast mathematical algorithms trade stocks in milliseconds and, as recent mistakes indicates, strain the system that is supposed to handle them. More and more stock trading is handled by computers, and many market players have called for stricter controls to prevent disasters from happening.
Those problems, which have severely damaged confidence in financial markets, have been becoming more frequent. In May the highly anticipated market debut of Facebook was marred by a series of technical bugs. Technical problems at Nasdaq delayed the opening of trading by half an hour and kept many investors from knowing if their trades had gone through.
At that time, Joyce was one of the most outspoken critics of Nasdaq. Monday, he appeared humbled by his own firm's mistake, but was also adamant that the two situations were different.
AP Business Writer Michelle Chapman contributed to this story.