Reuters: Regulatory News: UPDATE 6-Knight Capital gets $400 million rescue, shares tumble

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UPDATE 6-Knight Capital gets $400 million rescue, shares tumble Aug 6th 2012, 15:06 Mon Aug 6, 2012 11:06am EDT * Investors get 70 percent-plus in company * Analyst says company likely to be broken up * CEO: Made best deal possible to save firm * Shares tumble about 24 percent By Angela Moon NEW YORK, Aug 6 (Reuters) - A group of investors rescued Knight Capital Group Inc in a $400 million deal that keeps the embattled leader in U.S. market-making for equities in business, but comes at a huge cost to existing shareholders. Blackstone Group LP, rival market maker Getco and financial services companies TD Ameritrade Holding Corp , Stifel Nicolas, Jefferies Group Inc and Stephens Inc purchased preferred shares for what works out to be a 73 percent stake in the company, Knight said in a statement just before markets opened on Monday. As what was the largest U.S. provider of retail market-making in New York Stock Exchange and Nasdaq-listed stocks, Knight buys and sells shares for clients. It also provides liquidity to equity markets by stepping in to buy and sell stocks, using its own capital to ensure orderly activity. Knight shares fell 25 percent to $3.04 in morning trade. Knight Chief Executive Tom Joyce, in an interview with CNBC television, said it was "absolutely" the best deal that could have been struck, and that there was no better alternative among the roughly 90 approaches Knight received. The rescuing companies will buy preferred stock convertible at $1.50 each with a 2 percent dividend to save Knight, which was brought to its knees last week by a software glitch that caused errant trading in dozens of stocks. The preferred shares are convertible into about 267 million shares of common stock, Knight said in a U.S. Securities and Exchange Commission filing. The company will also expand its seven-member board of directors with three new seats. The New York Stock Exchange said it would temporarily transfer Knight's market-making responsibilities on more than 500 stocks -- and related Knight employees -- to Chicago-based Getco, until the recapitalization is complete. The exchange said both companies cooperated with the transfer. Knight has about 1,400 employees, according to a company filing. After the announcement, Getco traders were seen working in Knight Capital's booth, with NYSE staff there overseeing them. Vanguard Group, one of the customers that pulled orders from Knight last week, said on Monday it was again routing there. JP Morgan analyst Kenneth Worthington, in a client note after the initial reports on the rescue on Sunday night, said the deal presaged Knight's eventual breakup. "We don't expect investors to value Knight as an ongoing entity given its technology glitch generated a pretax loss equal to (about) 30 percent of shareholders equity and nearly wiped out the company in just 30-45 minutes of trading," he said. The atmosphere at Knight's Jersey City, New Jersey headquarters appeared relatively normal on Monday. Employees declined to comment to the multitude of reporters outside. FUTURE STILL UNCERTAIN But even if Knight has been saved for now, the company could face litigation from shareholders who have seen the value of their holdings plummet. The potential liability could increase if it were found that Knight violated market rules. The top U.S. securities regulator said on Friday that government lawyers were trying to determine whether Knight violated a new rule designed to protect the markets from rogue algorithmic computer trading programs. Joyce told CNBC he had spoken with U.S. Securities and Exchange Commission Chairman Mary Schapiro last week, seeking relief from the firm's predicament. Knight's problems started early on Wednesday, when a software glitch flooded the NYSE with unintended orders for dozens of stocks, boosting some shares by more than 100 percent and leaving the company with the trading loss. Knight's computers had been loaded with new software on Tuesday that was designed to accommodate a change on the NYSE, according to people familiar with the matter. When trading began, however, the computers poured a huge number of orders into the market. For about 10 minutes it was unclear where the orders were originating, according to people familiar with the matter. After NYSE officials pinpointed Knight, it took another 10 minutes for the company to figure out the source. DAMAGE SWIFT The damage to Knight was swift. Whereas Knight once accounted for 20 percent of the market-making activity in shares of Apple Inc, by midday on Friday it was the market maker for just 2 percent of the share volume, according to data from Thomson Reuters Autex. Knight's troubles highlight how vulnerable market makers are to the complex web of computers and software that constitutes the modern marketplace. For investors already suspicious that the system might be fundamentally broken after the "Flash Crash" of 2010 and the botched Facebook initial public offering in May, the troubles at Knight have only added to concerns. Sandler O'Neill + Partners and Wachtell, Lipton, Rosen & Katz advised Knight Capital on the bailout. Barclays advised TD Ameritrade on its investment. Link this Share this Digg this Email Reprints

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