Knight Capital Group’s long-term viability questioned
NEW YORK — Knight Capital Group’s lifeline may have headed off the Wall Street brokerage’s collapse, but it did not allay questions over the firm’s future.
The Jersey City, N.J., brokerage, whose business processes 10% of all U.S. stock transactions, received $400 million of new capital from a consortium of private equity funds and other major financial players. It will keep Knight in business after suffering massive losses last week when a software glitch sent out a stream of unintended trades.
Analysts say the deal sacrifices the company’s stock price in favor of survival. They also question whether Knight still remains viable in the long-term, and if the brokerage’s new owners would eventually sell it off in pieces.
“The reported transaction with private equity and broker firms only allows Knight some additional time for survival, and we believe that eventually the company could be broken apart and divested at opportune times,” JPMorgan Chase & Co. told clients.
The deal’s structure makes it hard for Knight’s stock to ever fully recover from the beating it took in the last week.
The investor group, including Jefferies Group Inc., Blackstone Group Inc. and Getco, bought a 73% stake in the company. That could result in 267 million more shares hitting the market, and would severely reduce the stakes of existing shareholders.
Investors reacted quickly Monday, sending shares of the company reeling. The stock lost 98 cents, or 24%, to $3.07 — well below the 52-week high of nearly $14 reached in October.
“That’s a huge dilution,” said Keith Moore, managing director for event-driven strategy at MKM Partners. “It’s a little surprising … but it tells you how desperate they were to get the money.”
A Knight spokeswoman did not respond to a request for comment. In a statement, Thomas Joyce, Knight’s chairman and chief executive, remained upbeat.
“With our financial position strengthened and liquidity restored, we will continue to provide clients with trading in a broad range of securities, high-quality execution and outstanding client service,” he said.
Joyce raced over the weekend to save the firm after Wednesday’s trading glitch triggered an estimated $440 million loss — equal to nearly four times the firm’s profit last year. The debacle led many of its biggest clients to halt routing orders through Knight, potentially suffocating its business.
Major brokerages including TD Ameritrade, Scottrade, E-Trade and Vanguard have since resumed trading with Knight. But analysts questioned how swiftly other customers would return in the wake of the trading glitch.
Even Knight noted risks ahead in regulatory filings Monday: “In view of the impact to the company’s capital base and the resultant loss of customer and counterparty confidence, there is substantial doubt about the company’s ability to continue as a going concern.”
The New York Stock Exchange said Monday that it temporarily assigned responsibility for 680 stocks that Knight handles as a primary market maker to another broker. NYSE said the move would allow Knight to focus on shoring up its finances.
It was not known when the exchange would return its business to Knight.
Analysts at Raymond James questioned whether Joyce, at Knight since 2002, would remain in place. At a minimum, they wrote, they expect Knight’s new investors to push for an independent chairman, which could provide an additional layer of oversight.
Either way, Moore of MKM Partners holds out hope that Knight can recover from the trading fiasco.
“They have very talented people and technology that’s second to none in the industry,” Moore said. “It’s hard to believe that one little piece of code can bring a firm to its knees.”
Bloomberg News contributed to this report.
