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Knight Capital Group hustling to find a buyer or secure funding

The brokerage, battered by a software glitch that caused $440 million in losses this week, is said to be meeting with investors and rivals about a possible deal.

August 04, 2012|By Andrew Tangel, Los Angeles Times
  • Knight Capital Group has handled about 11% of all trades in U.S. stocks. It primarily takes orders from retail brokerages, and then routes them to exchanges where the stocks are traded. Above, traders work at a Knight Capital Group post on the floor of the New York Stock Exchange on Friday.
Knight Capital Group has handled about 11% of all trades in U.S. stocks.… (Jin Lee, Bloomberg )

NEW YORK — Knight Capital Group lurched into the weekend with executives scrambling to find a buyer or secure emergency funding needed for survival.

The battered trading firm was said to be meeting with private equity investors and rival financial firms about putting together a deal. Knight has been left cash-strapped after a software glitch caused $440 million in losses from erroneous high-speed trades this week.

The brokerage did get a few boosts. Shares skyrocketed 60% on unconfirmed reports Knight secured a line of credit to stay in business through late Friday.

And many of Knight's biggest customers, who on Thursday suspended trading with the brokerage, offered support. TD Ameritrade and Scottrade, among others, said they'll soon begin processing orders through Knight's Jersey City, N.J., trading floor.

"We do have confidence in the execution services provided by Knight," Scottrade spokesman Whitney Ellis said. The firm declined to elaborate what prompted it to reverse course.

Knight has handled about 11% of all trades in U.S. stocks. It primarily takes orders from retail brokerages, and then routes them to exchanges where the stocks are traded.

Knight's trading loss has pushed the large, behind-the-scenes Wall Street firm to the brink. Its $440-million pre-tax loss equals nearly four times its profit last year. It exceeds the $365 million in cash on Knight's balance sheet at the end of the second quarter.

The debacle rekindled fears of computerized trading run amok and was reminiscent of the "flash crash" of May 2010, when $1 trillion vanished from the stock market after trading went haywire.

Calls for stronger regulations were mounting from industry groups and regulators.

Mary Schapiro, chairman of the U.S. Securities and Exchange Commission, on Friday called Knight's mishap "unacceptable." She said the agency's staff would seek regulations that would ensure Wall Street trading venues have proper safeguards.

"I have asked the staff to accelerate ongoing efforts to propose a rule to require exchanges and other market centers to have specific programs in place to ensure the capacity and integrity of their systems," she said.

At the New York Stock Exchange, Chief Executive Duncan Niederauer told analysts that the high-speed trading glitch highlighted the need for broad changes. He called on exchanges and market participants to focus on one set of rules for everyone to follow.

"We have talked about this publicly that the growing fragmentation and uneven regulations across what is now hundreds of competing platforms continue to fuel a crisis of confidence among investors," he said on a conference call with analysts. "It is just too hard for them to understand how the markets work."

Dennis Kelleher, president of Better Markets, a nonprofit that advocates for tougher Wall Street regulation, said high-speed computerized trading is one of the biggest problems facing financial markets and regulators aren't equipped to monitor it.

"This is not a glitch or a bug, this was a massive, computer-driven, wealth-destruction event that reveals how fragile the capital market structure in the United States has become and why investors are fleeing the markets like never before," Kelleher said.

Knight's shares gained $1.47, or 60%, to $4.05 — far below their price of about $10 earlier in the week.

Times staff writer Jim Puzzanghera in Washington contributed to this report.

andrew.tangel@latimes.com

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