Knight Capital Group Inc was fighting for survival on Thursday after a US$440 million trading loss caused by a software glitch wiped out much of its capital, forcing the firm to seek new funding as its shares plunged as much as 80 percent in two days.
Many of the company’s biggest customers, including TD Ameritrade, the No. 1 US retail brokerage by trading volume, and fund giants Vanguard and Fidelity Investments, stopped routing orders through Knight. One of the biggest fears is that the company will collapse, landing trading clients and creditors with losses.
“They have about 48 hours to shore up confidence,” said James Koutoulas, head of an advocacy group for former customers of failed brokerages MF Global and Peregrine Financial.
Knight said it was “actively pursuing its strategic and financing alternatives,” raising the likelihood the firm would be sold or face bankruptcy because of the loss, which is about four times its annual net earnings, and the subsequent damage to its business as customers and others question its stability.
As one of the leading market makers in US stocks, Knight is among the firms that are critical to smooth, orderly trading. Market makers match orders from buyers and sellers and often provide liquidity by stepping into the market themselves.
The speed at which Knight has unraveled has been particularly unnerving for investors and markets. It resulted from problems with the firm’s trading software that sent bogus, rapid-fire trades into the market for 45 minutes on Wednesday and left Knight with big losses on numerous stocks it bought at inflated prices.
“This is like a nuclear reactor or aircraft,” said Roy Niederhoffer, whose R.G. Niederhoffer Capital Management uses Knight. “There has to be some way of seeing the state of the whole system.”
He said that there was “no excuse” for Knight failing to stop its systems before the glitch had endangered the firm.
Knight is in talks with Silver Lake Partners-backed trading firm Virtu Financial LLC about a possible deal, according to the Wall Street Journal. Knight has approached JPMorgan Chase & Co for financing, according to a report on Fox Business Network. A spokesman for JPMorgan declined to comment. Spokeswomen for both Knight and Silver Lake also declined to comment.
The firm planned to set up a data room late on Thursday for potential bidders to comb through its books, a source familiar with the situation said. Some private equity firms were weighing whether to look at the company, the source added, saying that the situation was fluid.
Bloomberg reported the firm had hired Sandler O’Neill and Goldman Sachs to advise it on next steps. Goldman and Sandler O’Neill officials declined to comment.
“You have to find someone who is willing to move pretty quickly,” the source said. “It is a confidence issue.”
Knight’s trading loss has reignited debate over whether technology has elevated risk in trading to unacceptable levels.