How Knight Capital Almost Collapsed

Posted Aug 4, 2012

When Knight Capital Group started trading on Wednesday, everything was fine and dandy.  But by Friday Knight Capital was simply hanging on by a lifeline.  Due to a “computer-trading glitch,” the company lost $440 million.  The company was looking for a financial glitch that could help them avoid a sale, breakup, or even bankruptcy according to sources with The Wall Street Journal.

Such an emergency is similar to what happened during the financial crisis of 2008.  Crises that hit companies like Bear Stearns and Lehman Brothers Holdings are comparable.  Knight hands $20 billion of shares per day through the New York Stock Exchange.  On Friday Knight Capital told customers that they have received a line of credit to allow them to stay alive.  Unfortunately some of Knight’s largest clients are looking into rivals.

When it was revealed that Knight had enough credit to stay open, the stock price of the company stock price finally started to increase after a two-day drop of 75%, which had decreased the market cap by $750 million.

As many customers stated that they would stick with Knight, the stock price continued to increase on Friday again.  The shares ended up rising 57% to $4.05.  The source of Knight’s line of credit is not known.

The Securities and Exchange Commission Chairman Mary Schapiro said that Knight’s trading glitch was not acceptable.  The agency is now expediting a rule that requires exchanges and market centers to ensure system capacity.

Companies like TD Ameritrade Holding Corp. and Scottrade Inc. have resumed routing customer orders through Knight as of Friday.  But other financial institutions like Fidelity Investments, E*Trade, and LPL Financial Holdings are still supporting Knight.

To make matters worse for Knight Capital, the company suffered a pre-tax loss of $30-$35 million on the Facebook IPO due to Nasdaq glitches.  Knight is demanding compensation from the Nasdaq because of the glitch.

[Wall Street Journal]