Knight Capital Group—the firm responsible for last week’s stock market mayhem—was offered a US$400 million lifeline from other Wall Street companies yesterday.
But, the handout 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 donating group will receive 267 million shares that they’ll be able to convert to common stock for US$1.50 a share. The firm currently has about 98 million outstanding shares, according to FactSet.
The stocks can be converted to a 73% stake in Knight, which means the company is essentially handing over control to the investor group.
Its major assets include a 19.9% stake in DirectEdge and two electronic trading platforms: BondPoint for fixed income and Hotspot FX for currencies, reports Financial Times.
Since the trading glitch, Getco had temporarily assumed designated market maker status and custodial responsibility for 680 stocks from Knight Capital, says the NYSE Euronext.
Knight’s stock has been in free-fall since the massive computer error in its systems sent huge numbers of erroneous orders flooding into the market. It caused dozens of stocks to swing wildly in heavy volume.
It says the foul-up would cost the firm US$440 million as it paid for stock positions it mistakenly bought.
The company’s CEO Thomas Joyce, speaking in an interview on CNBC, said, “This was an isolated situation. We screwed up and 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 of trading technology.
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Even with the cash infusion, however, it’s not yet clear if the company will regain the trust of other key players in the stock market. Some of its trading partners say they’re suspending routing trades through them until the situation settles.
And Knight’s blunder has been a disaster for the firm’s current investors; the value of the company’s stock is now down 70% from Tuesday.
Also, the trading disaster has revived a thorny debate in the financial system about the merits of high-speed trading and the reliability of lightning-fast mathematical algorithms. Market players have called for stricter controls to prevent disasters from happening.
The SEC says the apparent trading error by Knight Capital Group reflects the type of event that can raise concerns for investors about our nation’s equity markets, which are the most resilient, efficient, and robust in the world.
“Reliance on computers is a fact of life in virtually every facet of business,” said SEC Chairman Mary Schapiro in a statement on Friday. “That doesn’t mean we shouldn’t endeavor to reduce the likelihood of technology errors and limit their impact when they occur.”
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She deems Knight’s error as unacceptable, and notes, “Several of the measures we instituted following the Flash Crash helped to limit its impact. Recently adopted circuit breakers halted trading on individual stocks experiencing significant price fluctuations, and clearly defined rules guided the exchanges in determining which trades could be broken giving the marketplace certainty.”
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In addition, she says existing rules say when broker-dealers with access to markets use computers to trade fast and frequently, they are required to check those systems are operating properly. Regulators are considering whether such compliance measures were followed in this case.
In particular, Shapiro has asked staff to “accelerate ongoing efforts to propose a rule requiring that all exchanges and other market centers have programs in place to ensure the capacity and integrity of their systems.”
A roundtable will occur in coming weeks to discuss next steps.