* Knight shares plunge as CEO says firm seeking financing
* TD Ameritrade, Fidelity routing orders to other market
* Knight attributes trading glitch to software problems
* SEC considering if new market measures needed
(Adds details about opening books to potential buyers, ETF
liquidity, quotes, updates after-hours price)
By Edward Krudy and Jed Horowitz and John McCrank
NEW YORK, Aug 2 Knight Capital Group Inc
fought for survival on Thursday after a $440 million trading
loss caused by a software glitch wiped out much of its capital,
forcing Knight to seek new funding as its shares plunged as much
as 80 percent in two days.
Many of the company's biggest customers, including TD
Ameritrade, the No. 1 U.S. retail brokerage by trading volume,
and fund giants Vanguard and Fidelity Investments, stopped
routing orders through Knight. One of the biggest fears is that
the company will collapse, landing trading partners with losses.
"They have about 48 hours to shore up confidence," said
James Koutoulas, head of an advocacy group for former customers
of failed brokerages MF Global and Peregrine Financial.
Knight said it is "actively pursuing its strategic and
financing alternatives," raising the likelihood the firm will be
sold or face bankruptcy because of the loss and subsequent
damage to business.
As one of the leading market makers in U.S. stocks, Knight
is among the firms that are critical to smooth, orderly trading.
Market makers match orders from buyers and sellers and often
provide liquidity by stepping into the market themselves.
The speed at which Knight has unraveled has been
particularly unnerving for investors and markets. It resulted
from problems with the firm's trading software that sent bogus,
rapid-fire trades into the market for 45 minutes on Wednesday
and left Knight with big losses on numerous stocks it bought at
"This is like a nuclear reactor or aircraft," said Roy
Niederhoffer, whose R.G. Niederhoffer Capital Management uses
Knight. "There has to be some way of seeing the state of the
whole system." He said that there was "no excuse" for Knight
failing to act sooner.
Knight is in talks with Silver Lake Partners-backed trading
firm Virtu Financial LLC about a possible deal, according to The
Wall Street Journal. Knight has approached JPMorgan Chase & Co
for financing, according to a report on Fox Business
Network. A spokesman for JPMorgan declined to comment.
Spokeswomen for both Knight and Silver Lake also declined
Late Thursday, the firm planned to set up a data room on
Thursday for potential bidders to comb through its books,
according to a source familiar with the situation. Some private
equity firms were weighing whether to look at the company, the
source added, saying that the situation was fluid.
A Bloomberg report said the firm had hired Sandler O'Neill
and Goldman Sachs to advise it on next steps. Goldman and
Sandler O'Neill officials declined to comment.
"You have to find someone who is willing to move pretty
quickly," the source said. "It is a confidence issue."
Knight's $440 million trading loss has reignited debate over
whether technology has elevated risk in trading to unacceptable
The U.S. Securities and Exchange Commission on Thursday said
it would consider whether new measures might be necessary to
"We continue to closely review the events surrounding
yesterday's trading and discuss those events with other
regulators as well as Knight Capital Group," said SEC spokesman
"We also are considering what, if any, additional steps may
be necessary, beyond the post-Flash Crash measures that limited
the impact of yesterday's trading," Nester said.
Advocates of trading systems that can pump thousands of
shares across Wall Street in milliseconds say the fault lies not
in the systems but in the lack of controls at individual firms.
Knight blamed its technology breakdown on new software that
routed a flood of erroneous orders to the New York Stock
Exchange on Wednesday, but offered no explanation as to why
traders didn't immediately intervene to arrest the obvious
DISASTERS SEEN INEVITABLE
Trading veterans say the sprawl of trading venues in the
United States coupled with the constant tinkering with software
codes and systems upgrades have led to such complexity that
disasters are bound to occur. Since March, a series of
embarrassing technology issues, including the botched Facebook
trading debut after its IPO and the failed public
offering of BATS Global Markets have rocked markets and shaken
the confidence of investors.
"You've got 13 exchanges, 50 dark pools, brokers that
internalize client orders at their own desks and thousands of
algorithms pumping orders in milliseconds," said Larry Tabb,
founder of Tabb Group, a financial consulting firm. "The
structure just may be too complicated to work."
But some experts fear that a regulatory and populist
backlash - let alone protests from competitors - will reverse
advances that benefit investors.
"I'm very worried people will take a look and say there is
something fundamentally wrong with the market, and there isn't,"
said Maureen O'Hara, a finance professor at Cornell University
who sat on an advisory panel that explored reforms after the
U.S. stock market collapsed inexplicably in a few minutes in the
2010 "Flash Crash."
USING OTHER MARKET MAKERS
Several large retail brokerages said they had not resumed
trading with Knight, instead routing orders to other market
makers. TD Ameritrade, which usually routes about 4.5
percent of its orders through Knight, is currently not sending
orders through the firm, said Joe Kinahan, its chief derivatives
He said as long as Knight remains in good standing with the
exchanges, TD Ameritrade will resume sending orders through it.
Mutual fund group Vanguard Group, which typically routes
about a quarter of its NYSE and Nasdaq trades through Knight,
was sending orders elsewhere. Scottrade, E*Trade, TD
Ameritrade, Pershing LLC, a subsidiary of BNY Mellon
, Invesco and Fidelity were all shifting orders elsewhere.
In 2011 Knight was the No. 1 market marker in retail U.S.
equity shares traded in NYSE and NASDAQ stocks. Knight's daily
market-making volume was $19.5 billion in June, down 12 percent
from a year ago as overall equity trading volumes have declined.
There were questions about how the firm's possible failure
could affect the network of 800 smaller brokerages that rely on
it to process orders, said Chris Nagy, a market structure
consultant. "Although they have very small amounts of order
flow, in aggregate, (they) represent a significant amount of
volume," he said.
Longview Capital Management, LLC, a Wilmington,
Delaware-based registered investment adviser with $200 million
in assets under management, is holding off from trading with
Knight until "it gets its act together and tell us where they
stand," said Christian Wagner, chief executive and chief
investment officer of the firm.
Exchange-traded fund issuers, for which Knight is the lead
market maker, have been calling competitors to make sure they
can step in if Knight does not execute trades in their funds,
according to two people familiar with the situation.
An official from AdvisorShares, an ETF provider with $670
million in assets, said officials from Knight called him
Thursday morning and addressed his concerns about some of
AdvisorShares' ETFs that were trading at wider spreads than they
would normally. That can happen when market makers are not
Retail investors and traders who want to buy and sell small,
illiquid exchange-traded funds may also be unwittingly losing
money because of wider spreads in the bid and ask price of the
ETFs at Knight since the incident, according to an analysis by
IndexUniverse, a San Francisco-based ETF research provider.
ATTENTION FROM REGULATORS
The Financial Industry Regulatory Authority, the industry's
self-regulator, said it has examiners at Knight and was working
with the firm and other regulators to review the impact from the
technology issues. It said Knight was currently in compliance
with capital requirements.
While securities regulators are looking into what went wrong
on the trading side, the focus in the futures industry is on the
estimated $411 million in customer funds that were part of
Knight's purchase in May of floundering futures brokerage Penson
Confidence in the futures industry's ability to safeguard
customer funds has been shaken after the collapse of futures
brokerages MF Global and PFGBest in the past year was followed
by accusations that they improperly raided customer accounts.
WORKING IN THE DARK
From even before the opening bell on Wednesday, traders
across the market noticed something wrong, saying they saw heavy
"indicated" volume for stocks that normally trade infrequently.
As soon as the market opened, an unusually high flow of
orders in more than 140 stocks came in, causing shares to move
rapidly. Knight later attributed the moves to software problems
that caused little-traded shares like China Cord Blood to
rise sharply, with some gaining more than 100 percent within
According to floor traders, Knight staff working on the
NYSE's floor were in the dark as well. According to sources,
algorithmic trading of this type is separate from regular
trading at the company's Jersey City, New Jersey, headquarters.
"The guys are down here on the floor so they were just as
caught off guard because they were actually suffering some of
the consequences of the failure of their own technology," said
Ken Polcari, managing director at ICAP Equities in New York, who
trades on the floor of the exchange.
As the crisis unfolded, traders at Knight were fielding
numerous calls and talking with officials in the firm's
technology department, who confirmed that the problems were
originating with Knight's software, and not with the NYSE.
It took 45 minutes to resolve the problems, again pointing
to the inability of individuals to contend with out-of-control
Knight's shares closed down 63 percent at $2.58 a share in
NYSE trading on Thursday. In after-market trading the stock hit
another all-time low, falling to $2.10, but moving back to $2.38
by early evening.
The firm's survival may rest in the hands of Knight Capital
CEO Tom Joyce, who told Bloomberg Television on Thursday the
firm had "excess capital right now," and said the goal was to
keep Knight in business.
When Joyce arrived in mid-2002 after the dot-com bust had
devastated the U.S. stock market, the market-maker was
struggling because of low trading volumes and high payouts made
to attract business from discount brokers.
Joyce, whose laid-back demeanor distinguishes him from many
more volatile executives in the trading business, spent 15 years
at Merrill Lynch & Co., and has considerable contacts on Wall
Street if a rescue deal is possible.
"Whenever you have a company that lost roughly half of its
tangible book value in five minutes, everything is on the
table," said Kenneth Pasternak, who co-founded Knight in 1995
and served as its chief executive until he retired in 2002. "All
he has to do it is pick up the phone."
Joyce has seen his considerable stake in his firm almost
wiped out in a matter of hours. As of April 2, Joyce owned more
than 1.2 million shares of Knight Capital, with a market value
of nearly $16 million -- a stake now worth less than $3 million.
"Unless Tommy Joyce can do some really massive damage
control and calm the markets and let everyone rest assured they
are OK and they are not going out of business they've got some
rocky days in front of them," Polcari at ICAP said.
(Reporting by Edward Krudy, Jed Horowitz, Angela Moon, Jessica
Toonkel, Chuck Mikolajczak, Lauren LaCapra, Sam Forgione, John
McCrank, Paritosh Bansal, Suzanne Barlyn and David Henry in New
York, Tim McLaughlin in Boston, Ann Saphir in Chicago and Sarah
Lynch in Washington; Editing by David Gaffen, Jennifer Merritt,
Martin Howell, Kenneth Barry, Leslie Adler, Gary Hill)