Report: Knight secures $400M rescue from investors

AP News
Posted: Aug 05, 2012 7:14 PM
Report: Knight secures $400M rescue from investors

WASHINGTON (AP) — Knight Capital Group reportedly has a deal to secure $400 million in financing that may enable it to avoid bankruptcy, days after a disastrous software glitch shook stock trading and jeopardized its future.

CNBC reported that the battered trading firm has an accord involving the brokerage firm TD Ameritrade Holding Corp., private-equity firms General Atlantic — parent of trading firm Getco — and Blackstone, and brokerage and investment bank Stifel Nicolas.

The rescue calls for the companies to purchase a $400 million convertible preferred security that gives them the right to buy Knight shares at $1.50, according to CNBC, which cited unnamed sources close to the deal.

That price is 63 percent below Knight's closing at $4.05 on Friday, and represents a significant dilution for existing investors, but it will allow the firm to open for business Monday.

The company spent the weekend in intense negotiations to put together a long-term deal to assure investors ahead of Monday's market opening.

A Knight spokeswoman said she could not confirm the deal.

CNBC said the four buyers would own 70 percent of Knight Capital Group Inc.

The Jersey City, N.J.-based trading firm 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.

The company has been fighting for survival since Wednesday, when a problem with a newly installed piece of software wound up funneling erroneous orders for some 140 stocks to the market for the first 45 minutes of trading. That caused shares of some stocks to swing wildly.

Those 45 minutes have been devastating for Knight, which has scrambled to reassure clients and investors that it's got things under control. The head of the Securities and Exchange Commission on Friday publicly called the incident "unacceptable."

Knight was left on the hook for some $440 million to cover the mistaken trades, or nearly four times what it earned last year. That expense, it said, "severely impacted" its capital base, and the company said it might be forced to sell itself.

Knight's blunder revives a thorny debate in the financial system about the merits of high-speed trading, where lightning-fast mathematical models trade stocks in milliseconds and, as recent mistakes indicates, strain the system that is supposed to handle them.

The foul-up was the latest in a string of high-profile technical problems that have left some investors convinced they can't trust the financial markets. The biggest was the "flash crash" in May 2010, when a computer problem caused the Dow Jones industrial average to drop nearly 600 points in five minutes. The most recent was Facebook's debut on the Nasdaq stock exchange in May, when technical problems at Nasdaq kept some investors from knowing if their trades had gone through.