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A-Team Insight Blogs

Knight Under New Ownership Following ‘Algos Gone Wild’ Debacle and $440 Million Trading Loss

Knight Capital Group now has new owners as a result of hastily arranged $400 million equity refinancing, required to keep the trading firm alive after trading losses last Wednesday of $440 million, the result of algorithmic trading that went horribly wrong.

The new equity – two percent preferred shares that may be converted into common stock at $1.50 per share – comes from Jefferies Group, which conceived and structured the investment, as well as Blackstone, Getco, Stephens, Stifel Financial Corp. and TD Ameritrade. It means those firms own about 73% of Knight, which will expand its board of directors to accommodate three new members. Until the deal is complete, Knight’s market making role on the New York Stock Exchange has been transferred to Getco.

Knight’s woes – and near death – started on Wednesday morning last week when new software installed – at least partially to support NYSE Euronext’s new retail investor program – unleashed millions of erroneous buy orders into the NYSE market over a 45 minute period. That resulted in a $440 million pre-tax trading loss for Knight.

Details of the nature of the software glitch have not been released, though it’s certain that the SEC – already somewhat bearish on automated trading – will examine the circumstances very closely.

Industry observers – with recent technology snafus at Bats Global Markets and Nasdaq OMX fresh in their minds – are questioning how such faulty software could have been put into production. Meanwhile, Knight is likely facing SEC action and possible litigation from shareholders.

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