http://www.businessweek.com/news/2012-08-02/knight-capital-s-375-million-of-convertible-bonds-decline

( If Knight did give 70 percent of the company to the four investors providing 400 million in vulture financing today , I think they have a problem as their 375 million in convertible notes could come due as more than 50 percent of the company will be owned by the new Group. )

Knight Capital Group Inc. (KCG) (KCG)’s bonds declined after the firm said yesterday’s stock trading breakdown will prompt losses of $440 million.

The company’s $375 million of 3.5 percent convertible bonds due in March 2015 fell 8.625 cents to 74.5 cents on the dollar and yielded 15.8 percent as of 2:45 p.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The debt traded as low as 40 cents earlier.

Shares of the Jersey City, New Jersey-based firm have plunged (KCG) 72 percent in the past two days to $2.86 as of 2:57 p.m. in New York after Knight’s computers helped spur sudden price swings of 10 percent or more in dozens of companies. The firm, whose projected loss is almost quadruple its 2011 net income (KCG), said today it’s exploring strategic and financial alternatives to strengthen its capital base.

The bonds are convertible to stock at $20.87 a share. Investors who own the note can demand repayment upon a “fundamental change” in the company including a sale for cash or if a person or group discloses a more than 50 percent ownership stake in Knight, according to a February regulatory filing.

and won't Knight need additional money - not just to close the Goldman trade on Monday but also payoff converts presented related to the 375 million 2015 notes ? ?

http://www.zerohedge.com/news/knight-see-another-day-following-60-convertible-dilution

Knight To See Another Day Following 60%+ Convertible Dilution

Submitted by Tyler Durden on 08/05/2012 17:58 -0400

Bond

Counterparties

David Faber

GETCO

According to CNBC's David Faber, Knight Capital will live at least for another day and avoid bankruptcy. Instead, it will experience dilution which will make its equityholders almost wish the company was filing. Knight, via Jefferies, is about to stick its shareholders with a massive dilution following the issuance of a $400 million convert bond at a $1.50 conversion price, or more than 60% dilution from Friday's $4.05 closing price.

This effectively means that the equity slice is for all intents and purposes wiped out and will be crammed down by a convert (technically upon conversion pari passu with the equity, but implicitly a 60%+ discount to market to stimulate new strategic investor interest), which itself may also be at risk, if Knight's action is insufficient to restore confidence in the firm from its counterparties. It also means that since the convert is unsecured, those who invest in it could face full write down on their investment shortly, which likely means the previously discussed TD Ameritrade and Getco.

But the good news, at least for Knight's 1400 employees, is that they will have a job for at least a few more days until the true fallout of last week's mega trade blunder is understood.

and....

http://www.cnbc.com/id/48516238

Knight Capital Group has been saved with an infusion of $400 million in the form of a convertible preferred security that gives the buyers the right to buy Knight shares at $1.50, according to sources close to the deal.

Jin Lee | Bloomberg | Getty Images

Traders work at a Knight Capital Group Inc. post on the floor of the New York Stock Exchange. Knight Capital Group Inc., struggling to stay afloat after a trading error spurred a $440 million loss.

The private-equity firm of General Atlantic(which owns the Getco market maker) along with Blackstone private equity, Omaha brokerage firm TD Ameritrade [AMTD 16.07

0.70 (+4.55%)

], and Stifel Nicolas will buy the $400 million preferred, which has a conversion price of $1.50 and will massively dilute the trading firm, but allow it to replenish its coffers and open for business on Monday.

The four buyers of the preferred will together own about 70 percent of the firm, which upon conversion of the preferred, will see its share count rise from a hundred million shares to roughly 350 million shares. The coupon on the preferred is 2 percent, but all the firms are expected to convert after 10 business days.

Jefferies led the offering and has been engaged with Knight since it suffered a $440 million trading loss on Wednesday.

A Knight spokeswoman declined to comment.

Knight [KCG 4.05

1.47 (+56.98%)

] officials and their bankers had been working since late in the week to raise emergency capital after a software glitch created $440 million in losses from erroneous stock deals Wednesday morning.

Late Wednesday, Goldman Sachs [GS 100.98 3.17 (+3.24%) ] agreed to purchase the unwanted stock positions from Knight as part of a big basket, people familiar with the matter have said, at a discount for their original purchase price.

http://www.bloomberg.com/news/2012-08-05/knight-said-focused-on-investment-to-add-capital-keep-control.html?cmpid=yhoo

Knight Said Focused On Investment To Add Capital, Keep Control

By Whitney Kisling and Stephanie Ruhle - Aug 5, 2012 4:14 PM ET

Knight Capital Group Inc. (KCG) executives are focused on negotiating an outside investment that would restore the firm’s capital and preserve its independence, said two people with knowledge of the matter.

They hoped to agree on the terms within hours, said one of the people, who requested anonymity because the discussions are private. Knight, whose market-making unit executes about 10 percent of U.S. equity volume, has been fighting for survival since a computer breakdown spewed orders through the stock market Aug. 1 and spurred a $440 million trading loss.

Knight spokeswoman Kara Fitzsimmons didn’t respond to a request for comment.

“There’s a lot of questions about their liquidity -- do they have the money to get through the trade settlement on Monday?” Patrick O’Shaughnessy, an analyst at Raymond James & Associates Inc., said in an interview with Pimm Fox on Bloomberg Television’s “Taking Stock.” “They have to find somebody to either invest capital into the company or somebody who’s just going to buy the company outright.”

Knight turned to Goldman Sachs Group Inc. (GS) on Aug. 1 to buy the firm out of trading positions acquired by mistake when a computer program malfunctioned, a person with knowledge of the matter said. It has until the close of business on Aug. 6 to complete the transaction.

and.....

http://online.wsj.com/article/SB10000872396390444246904577571113923528168.html

( knight really desperate if a vulture financing deal with convertible debt with a price point of 2.50 is the best they can swing.. )

Knight Capital Group Inc. KCG +56.98% on Sunday was discussing a deal that would involve discount brokerage giant TD Ameritrade Holdings, AMTD +4.55% electronic trading firm Getco LLC and other investors teaming to rescue the stricken firm, according to people with knowledge of the discussions.

TD Ameritrade and Getco were said to be the main investors in a consortium deal involving more than a half-dozen entities that would inject about $400 million into Knight, rocked Wednesday when a software problem drove a $440 million loss for the New Jersey-based firm.

Knight was still pursuing other avenues as well, with no agreements finalized as of Sunday afternoon and no guarantee of a deal, said people familiar with the matter.

The consortium arrangement would center on debt that would convert into stock at $2.50 per share, heavily diluting Knight's existing shareholder base, the people said.

The investment bank Jefferies & Co. is involved in structuring the arrangement, according to people with knowledge of the deal. Sandler O'Neill + Partners was hired in recent days to advise Knight, which is seen needing to shore up its finances in order to continue doing business.

A Knight spokeswoman declined to comment.

The discussions followed all-day meetings at Knight on Saturday as the hobbled brokerage sought to negotiate a transaction that would provide long-term funding, the people said.

On Thursday, Knight arranged short-term funding that allowed it to operate on Friday. Knight needed the funding in place to be sure it could meet margin requirements, a necessary step in clearing trades at the heart of the firm's brokerage business.

Knight operates with two types of loans, short-term credit lines to fund daily trading and $300 million of syndicated loans for general corporate purposes, according to public filings. Several hedge funds have approached Knight about refinancing the syndicated loans if necessary, other people said.

http://www.zerohedge.com/news/knight-schr%C3%B6dinger-cat-brokerage-scrambles-half-alive-half-dead

From Knight To Schrödinger Cat: Brokerage Scrambles Half-Alive, Half-Dead

Submitted by Tyler Durden on 08/05/2012 13:11 -0400

Update via CNBC:

CITADEL, KRR SAID NO LONGER TO BE LOOKING AT KNIGHT
KNIGHT CAPITAL CLOSE TO FUNDING DEAL, CNBC'S KATE KELLY SAYS
KNIGHT MAY GENERATE ABOUT $400 MLN FROM INVESTORS, KELLY SAYS
GETCO, TD AMERITRADE LIKELY PART OF INVESTMENT GROUP: KELLY

Or not. We will know for sure in a few hours after TD and Getco know all they need to know about Knight's business and no longer need to give it false hope.

Knight Capital is scrambling: it has a few hours to convince any potential suitors that it is worth some $300 million more alive than having its carcass picked off at a cost of $0.01 over its debt (which itself will likely be materially impaired) in a Chapter 11 Stalking Horse sale. If the Sunday before the Lehman, and MF Global, bankruptcy filings is any indication, the third time will not be the charm for the company whose 1400 employees may have no place to call work at 9am tomorrow. Sadly, in a world in which entire countries and continents have taken on the patina of Schrödingerian felinism, constantly shifting between alive and dead states depending on who is looking, we would take the under on the probability that the firm's lawyers will not be visiting 1 Bowling Green at some point in the next 16 hours.

From the WSJ:

Knight Capital Group Inc. continued talks Sunday morning aimed at a deal that would allow the company to avert bankruptcy and open for business Monday morning, according to people familiar with the matter.

The discussions followed all-day meetings at Knight on Saturday as the hobbled brokerage sought to negotiate a transaction that would provide long-term funding, the people said. A software error at Knight last Wednesday caused millions of errant trades that the Jersey City, N.J.-based firm later said would cost it $440 million.

On Thursday, Knight arranged short-term funding that allowed it to operate on Friday. Knight needed the funding in place to be sure it could meet margin requirements, a necessary step in clearing trades at the heart of the firm's brokerage business.

Knight operates with two types of loans, short-term credit lines to fund daily trading and $300 million of syndicated loans for general corporate purposes, according to public filings. Several hedge funds have approached Knight about refinancing the syndicated loans if necessary, other people said.

It wasn't clear whether any such deal would happen, and the firm was also making bankruptcy preparations in case an agreement falls through.

The problem with Knight is that this is not a simple refinancing in a (Z/N)IRP environment: that could have been achieved in no time at all. In this case, it means providing additional capital to plug already incurred balance sheet losses, and shortfalls, that amount to more than the company's entire cash balance. That would mean not only cramming down everyone else on the balance sheet, but finding new unencumbered hard, money-good assets that can be pledged against new cash. Alas, very much like Europe, Knight just does not have these. Instead, anyone interested in the firm's existing assets will likely wait until fair value impairments wipe out its equity cap and impair its debt for a "fresh start", at which point any incremental debt will provide operation funding. Just like the Barclays take under of Lehman's North America brokerage even as the rest of the firm remained as a bad bank. In other words: a bankruptcy filing.

If this is the ritualistic sacrifice that has to be made in order to get someone within the regulatory staff to finally do something about the persistent threat that is HFT, so be it. All of this could have been avoided a long time ago ago if the SEC actually understood what it was doing and had any idea of how broken the market was, and if the SEC was not co-opted by the same HFT interests that have made amockery of stock trading.

and from Bloomberg , more details.......

http://www.bloomberg.com/news/2012-08-05/knight-pursues-investors-as-citadel-kkr-said-to-bow-out.html?cmpid=yhoo

Knight Pursues Investors As Citadel, KKR Said To Bow Out

By Saijel Kishan and Whitney Kisling - Aug 5, 2012 2:53 PM ET

Knight (KCG) Capital Group Inc., fighting for survival after a $440 million loss spurred by a software failure, worked to find an investor after people familiar with the matter said two potential suitors were no longer interested.

Citadel LLC and KKR & Co. are no longer exploring an investment, the people said. Knight, responsible for about 10 percent of American equity volume, turned to Goldman Sachs Group Inc. (GS) on Aug. 1 to buy the firm out of trading positions acquired by mistake when a computer program malfunctioned, a person with knowledge of the matter said. It has until the close of business on Aug. 6 to complete the transaction.

Enlarge image

Knight Pursues Investors After Citadel, KKR Bow Out

Traders work at a Knight Capital Group Inc. post on the floor of the New York Stock Exchange on Aug. 3, 2012. Photographer: Jin Lee/Bloomberg

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Citadel, a hedge fund that has a market-making and electronic-trading business, walked away from talks yesterday, said one of the people, who asked not to be named because the discussions are private. Efforts to reach Ken Griffin, founder of Chicago-based Citadel, weren’t immediately successful. Kristi Huller, a spokeswoman for New York-based KKR, declined to comment.

Convertible Bonds

Knight may raise $400 million through the sale of convertible bonds to investors including Getco LLC and TD Ameritrade Holdings Corp., CNBC reported, citing a person involved in the deal. Sophie Sohn, a spokeswoman for Chicago- based Getco, didn’t immediately return a phone call and e-mail seeking comment. Kim Hillyer, a spokeswoman for TD Ameritrade, declined to comment on “rumor or market speculation.”

Knight made it to the weekend after receiving short-term financing for market making, according to a person familiar with the matter who requested anonymity. TD Ameritrade and Scottrade Inc., which sent trades elsewhere for execution after Knight’s software failure, said Aug. 3 they were routing orders back. Knight’s stock surged 57 percent to $4.05 in New York after tumbling 75 percent in the previous two sessions.

Joyce was in meetings at the company’s headquarters in Jersey City, New Jersey, according to his secretary on Aug. 4, who didn’t give her name. Joyce did not return a call seeking comment.

Buyout Firms

As the company opened its books to potential saviors, people with knowledge of the matter said KKR, TPG Capital and Silver Lake were among buyout firms that had an initial interest -- although one said chances of a private-equity deal are small. Citadel had expressed interest, as has Two Sigma Securities LLC, a New York-based market maker, people with direct knowledge of the matter said.

A spokeswoman for Chicago-based R.J. O’Brien & Associates declined to comment on an Aug. 3 New York Times report that the company was among a group of potential buyers in talks about Knight’s futures brokerage.

“As a matter of policy, RJO doesn’t comment on rumor or speculation and doesn’t discuss conversations it may or may not be having with other entities,” Ellen G. Resnick of Crystal Clear Communications, said on the firm’s behalf.

Kara Fitzsimmons, a Knight spokeswoman, declined to comment today. David Wells, a spokesman for New York-based Goldman Sachs, said he couldn’t comment; representatives at Silver Lake, TPG, KKR, Citadel and Two Sigma declined to comment Aug. 3.

Working Weekend

People trickled in and out of Knight’s Jersey City headquarters this morning, with polo shirts and khakis outnumbering business suits. None would comment on the record to Bloomberg News. Around noon, platters of sandwiches and salads from Vito’s Italian Deli in Hoboken were delivered.

“I seriously doubt they will go out of business,” Kenneth Pasternak, who co-founded Knight in 1995, said in a phone interview from his Ridgefield Park, New Jersey, private equity firm Kabr Real Estate Investment on Aug. 3. Pasternak bought shares in Knight during its two-day plunge. “I just hope they can maintain the innovation. My fear is they will be bought by some big bank and become consumed.”

Adviser Aid

Knight is working with Sandler O’Neill & Partners LP as advisers in the rescue talks, said one of the people, who spoke on condition of anonymity because the discussions are private.

The trading fault, which caused stocks to move as much as 151 percent, left the firm with a “large error position,” Knight Chief Executive Officer Thomas Joyce told Bloomberg Television Aug. 2.

“We’re talking to a lot of capable people, people who are in touch with situations like this,” Joyce said. “This was an anomaly, not one we’re proud of.”

Scottrade spokesman Whitney Ellis said the online retail brokerage began routing orders to Knight Aug. 3. TD Ameritrade resumed routing with Knight after testing its systems.

“After considerable review and discussion, we are resuming our order routing relationship with Knight,” said Fred Tomczyk, president and chief executive officer at TD Ameritrade, in a statement. “Knight is one of many order routing destinations for us and has long been a good and trusted partner.”

John Woerth, of Vanguard Group Inc., said in an Aug. 3 e- mail that the company continued to avoid routing brokerage orders through Knight. Fidelity Investments, the second-largest mutual-fund company, is sending orders elsewhere, according to a person familiar with the matter, who asked not to be identified because the information is private.

Biggest Risk

“Knight may or may not have the ability to withstand this on a balance sheet basis, but their biggest risk is if people decide not to do business with them,” Keith Wirtz, who oversees $14.7 billion as chief investment officer for Fifth Third Asset Management in Cincinnati, said in a telephone interview. Fifth Third is a client of Knight’s. “Your confidence with a counterparty like a Knight is only as strong as their skills as well as their balance sheet.”

About 23 percent of Vanguard’s market orders in NYSE-listed securities were routed to Knight last quarter, according to a filing. The figure was 41 percent at Scottrade, 38 percent at Fidelity’s National Financial Services LLC unit and 9 percent at TD Ameritrade.

‘Break Down’

Fitch Ratings said in a statement that it does not expect any major counterparties of Knight to suffer large losses even in a bankruptcy scenario since many have already switched to other market makers. The issue still may lead to a structural change in the business, the ratings firm said.

The events precipitated by Knight’s malfunction “pose risks for equity trading volume as many investors become more concerned about seemingly unforeseeable risks related to trading technology problems and the broader market impact of high- frequency trading systems that periodically break down,” Fitch said in the statement.

The number of exchange-listed securities changing hands on average each day fell 11 percent to 6.12 billion in July from a year ago, according to data compiled by Bloomberg.

Knight’s $440 million loss compares with net income of $115.2 million in 2011 and is more than the company’s market value as of Aug. 3, data compiled by Bloomberg show. The company was worth as much as $4.8 billion in 2000 and valued at more than $1 billion before the trading mistakes, according to data compiled by Bloomberg.

Revolving Credit

The loss represents about 40 percent of Knight’s book value and would “exhaust” the firm’s cash, according to CLSA Credit Agricole Securities. Knight had $365 million of cash as of the end of June, with about $70 million in its revolving credit line, Robert Rutschow, a New York-based analyst with CLSA, wrote in a report.

Knight’s market-making unit executed a daily average of $19.5 billion worth of equities in June, according to its website. The unit traded 711 million exchange-listed shares a day in June, according to data compiled by the company and Bloomberg.

The NYSE reviewed trading in 140 stocks from Molycorp Inc. to AT&T Inc. as the market’s Aug. 1 open was disrupted. Trades that occurred during the height of the volatility were canceled in six securities, where prices swung at least 30 percent in the first 45 minutes. Trades in all of the other stocks were allowed to stand.

Regulations Coming

The software malfunction was the latest black eye for the computer infrastructure of an equity market still haunted by the May 2010 market crash, the botched initial public offering of Facebook Inc. (FB) and failed IPO of Bats Global Markets Inc.

George Smaragdis, spokesman for the Financial Industry Regulatory Authority, said in an e-mail Aug. 3 that Finra has examiners at Knight and is working with the firm and other regulators to review the impact of the incident.

Securities and Exchange Commission Chairman Mary Schapiro, whose agency is the main market overseer in Washington, described the Knight event as “unacceptable,” and promised to issue regulations to help prevent similar mishaps.

“I have asked the staff to accelerate ongoing efforts to propose a rule to require exchanges and other market centers to have specific programs in place to ensure the capacity and integrity of their systems,” she said in a statement. The chairman also said the agency will hold a public meeting with industry participants in the coming weeks “to discuss further steps that can be taken to address these critical issues.”

The error highlighted the fragility of an industry spread across about 50 trading venues. The head of the New York Stock Exchange said the firm’s crisis is a “call to action” to fix a market that’s grown too complex to explain to regulators.

“The structure that has evolved over the last decade in the U.S. has led to inexorable fragmentation, really an emphasis on speed, a feeling that if something is faster than by definition it’s better,” NYSE Euronext (NYX) Chief Executive Officer Duncan Niederauersaid during a conference call after the company reported earnings Aug. 3. “We are understanding that speed is not always better.”

http://dealbook.nytimes.com/2012/08/02/errant-trades-reveal-a-risk-few-expected/

( Knight can forget insurance coverage for their 440 million trading loss if this is accurate.. )

Errant Trades Reveal a Risk Few Expected

BY NATHANIEL POPPER AND PETER EAVIS

Brendan McDermid/Reuters
Richard Drew/Associated Press
Andrew Harrer/Bloomberg News
Mark Lennihan/Associated Press

Errant trades from the Knight Capital Group began hitting the New York Stock Exchange almost as soon as the opening bell rang on Wednesday.

The trading firm Knight Capital recently rushed to develop a computer program so it could

take advantage of a new Wall Street venue for trading stocks.

But the firm ran up against its deadline and failed to fully work out the kinks in its system,

according to people briefed on the matter. In its debut Wednesday, the software went awry,

swamping the stock market with errant trades and putting Knight’s future in jeopardy.

The fiasco, the third stock trading debacle in the last five months, revived calls for bolder

changes to a computer-driven market that has been hobbled by its own complexity and

speed. Among the proposals that gained momentum were stringent testing of computer

trading programs and a transaction tax that could reduce trading.

In the industry, there was a widespread recognition that the markets had become more

dangerous than even specialists realized.“What is starting to become clear is that the costs

in terms of these random shocks to the system are occurring in ways that people never

anticipated,” said Henry Hu, a former official at the Securities and Exchange Commission

and a professor at the University of Texas in Austin.

Knight, founded in 1995, is a leading matchmaker for buyers and sellers of stocks, handling

11 percent of all trading in the first half of this year, according to the data firm Tabb Group.

Knight lost three-quarters of its market value in the last two days, in addition to losing

$440 million from the errant trades, and was scrambling to find financing or a new owner.

While the turbulence on Wednesday hit scores of individual stocks, the broader market took

the spasm in stride, closing down less than 1 percent on Wednesday and Thursday. The

S.E.C., which has opened an investigation into potential legal violations at Knight, said it

was “considering what, if any, additional steps may be necessary.”

Some S.E.C. officials are pushing new measures that would force firms to fully test coding

changes before their public debut, according to a government official who spoke on the

condition of anonymity. While the idea has long been discussed at the agency, it gained

traction after the Knight debacle.

The S.E.C. applied limited safeguards on trading after the “flash crash” of 2010 sent the

broader market plummeting in a matter of minutes. But big investors like T. Rowe Price,

members of Congress and former regulators said Thursday that the S.E.C. and the industry

had been too complacent and needed to do more to understand and control the

supercharged market.

“Things are happening far too regularly,” said Ed Ditmire, an analyst at Macquarie

Securities who focuses on stock exchanges. “It’s not nearly as solid a market as it should be,

so there’s plenty of room for improvement.”

Arthur Levitt Jr., a former chairman of the Securities and Exchange Commission, said that

recent events “have scared the hell out of investors” and called for the agency to hold

hearings.

“I believe this latest event was handled better than the flash crash, but the larger question is

whether our markets are adequate to deal with the technology that is out there,” Mr. Levitt

said. “I don’t think they are.”

Regulators have made changes to the markets over the last two decades that have taken it out of the hands of a few New York institutions and allowed dozens of high-frequency trading firms and new trading venues to dominate the stock market.

The high-speed firms like Knight, which connect directly to the servers of the exchanges and

are capable of executing thousands of trades a second, are responsible for more than half of

all activity in American markets. Companies that have benefited from the fragmentation

and computerization of the markets have largely managed to fend off tighter controls by

pointing to the steady decline in the cost of trading stocks.

Some large, institutional investors, like Vanguard, have said that the increased volume of

trading has made it easier to get in and out of stocks, lowering the ultimate costs for

individuals who invest in popular vehicles like mutual funds.

But even people who had previously defended the advances in trading technology said on

Thursday that too many problems had been overlooked.

In Knight’s breakdown on Wednesday, as well as in the botched initial public offerings of

Facebook in May and BATS Global Markets in March, the problems were caused by new

computer programs that had not been adequately tested. Currently regulators have no

protocol for signing off on new software programs like the one Knight rolled out.

“When they put these things out in the world they are really being tried for the first time in

a real-life test,” said David Leinweber, the head of the Center for Innovative Financial

Technology at the Lawrence Berkeley National Laboratory. “For other complex systems we

do offline simulation testing.”

Mr. Leinweber has suggested to the S.E.C. that it do this work with the help of the

supercomputing facilities at his center. The S.E.C. has recently moved in this direction by

contracting with a high-speed trading firm that will provide it with more up-to-date

market information.

Other changes to the markets would help slow trading during crises. Before computer trading became dominant, if a flood of unusual orders came in, they would usually be questioned by human order matchers, called specialists, working on the floor of the New York Stock Exchange.

To mimic that role, regulators are introducing a circuit breaker called the “limit up, limit

down.” This forces a pause in trading of a stock if it starts occurring outside a normal price

range. The mechanism will start in February.

“Quite literally, it could have stopped the flash crash,” said Gus Sauter, the chief investment

officer at Vanguard.

The S.E.C. did introduce some circuit breakers after the flash crash but they stopped trading

in only five of the stocks that were hit by Knight’s faulty program.

Some critics of the current market structure have said that much bolder reform is needed.

One change that has been contemplated is a financial transaction tax, which would force

firms to pay a small levy on each trade. At the right level, this could pare back high-

frequency trading without undermining other types, supporters say.

“It would benefit investors because there would be less volatility in the market,” said

Representative Peter DeFazio, a Democrat of Oregon. He introduced a bill containing a

financial transaction tax last year.

Opponents of such a levy say that it could hurt the markets and even make it more expensive

for companies to raise capital.

“I would be very concerned about unintended consequences,” said Mr. Sauter.

But Representative DeFazio, who favors a levy of three-hundredths of a percentage point on

each trade, says he thinks the benefits of high-frequency trading are overstated. “Some

people say it’s necessary for liquidity, but somehow we built the strongest industrial nation

on earth without algorithmic trading,” he said.

http://www.reuters.com/article/2012/08/04/us-knightcapital-loss-idUSBRE8710PG20120804?feedType=RSS&feedName=globalMarketsNews&rpc=43

(Reuters) - Knight Capital Group Inc's future remained in flux as it headed into the weekend trying to clinch a rescue deal, but there was skepticism on Wall Street that one of the largest U.S. equities trading firms would find a suitor before Monday.

Knight was plunged into crisis on Wednesday when it lost $440 million, most of its capital, after a software glitch caused it to make thousands of unintended trades on about 140 stocks.

Knight said on Thursday it was actively pursuing strategic and financing alternatives.

Early on Friday unconfirmed reports that the company had received a line of credit led to a partial recovery in its stock price and helped persuade some major clients to resume trading with the firm.

At least one private equity firm, TA Associates, signed a non-disclosure agreement with the firm, a signal that it was looking at Knight's books for a potential acquisition or investment. TA Associates was not immediately available for comment. Knight did not respond to calls on Friday.

Sources familiar with the plans of some other private equity firms said they would be looking at Knight as well.

But sources at some other U.S. private equity firms that are active in the financial services sector said they had been approached by Knight's advisers Sandler O'Neill but decided not to pursue a deal with the firm.

"To go in fast and take a lot of risk - usually you do that when the terms and the price are safe," said a senior private equity executive whose firm was approached but decided not to pursue Knight.

One difficulty for bidders would be estimating the size of potential legal liability that the company could face in any shareholder lawsuits or enforcement action by regulators. With little time to investigate the reasons for the trading problems, it could be hard to assess the risks before making a deal.

A trader at Knight, asked if he knew who was responsible for the glitch, said: "Everyone was like, not to say pointing fingers at each other, but like 'Who's doing this?' kind of atmosphere. ‘It ain't me. I'm on the program desk. It's not me, I can assure you of that,'" the trader said.

The top U.S. securities regulator said government lawyers are trying to determine if Knight violated a new rule designed to protect the markets from rogue algorithmic computer trading programs.

The Securities and Exchange Commission's market access rule requires brokers to put in place risk control systems to prevent the execution of erroneous trades or orders that exceed pre-set credit or capital thresholds.

In particular, the SEC said it is looking at whether the software used by Knight was properly tested before it was put into use.

Shares of Knight, the nation's largest retail market maker of U.S. stocks, closed up 57 percent at $4.05 on Friday, still well below their $10.33 closing price on Tuesday, the day before the trading debacle occurred.

For a market already suspicious that the system might be fundamentally broken after 2010's "Flash Crash" and the botched Facebook IPO in May, the troubles at Knight have been another blow to investor confidence.

Other Wall Street banks and brokers are poring over their trading systems and rethinking the way they test software to make sure they don't become the next Knight.

Executives at the firms said it was a wake-up call that could prompt them to improve risk management controls. However, at a time when Wall Street is cutting costs, spending money on better systems to test software and manage risk could be an expensive proposition.

"We want to make sure that what happened to Knight doesn't happen to us," said the head of one investment bank.

In a letter to clients, Knight's futures division confirmed that customers' funds for commodity futures trading accounts "are segregated and kept separate from the funds of Knight" as required by regulators.

MOVING QUICKLY

Knight's predicament has become all-too familiar in recent years. During the financial crisis of 2008, several major financial services firms, including Bear Stearns and Lehman Brothers, fought for their survival over a weekend. Bear was rescued and Lehman went under by Monday morning.

More recently, MF Global frantically tried to find a white knight over a weekend and failed, filing for bankruptcy.

Knight faces some of the same challenges in finding a savior over a short period of time. Any buyer will need the ability to move quickly and put up enough capital to make sure that Knight remains a reliable counterparty to its trading partners, financial services bankers and private equity executives said.

A buyer would also have to get comfortable with Knight's financials, and perhaps more importantly its technology, and be sure that the glitch does not happen again, the bankers and executives said.

One private equity investor said he suspects that eventually Knight will get broken up. "Knight has many more businesses than just the equity market making business. Some are good and some are not," he said. "I'm not sure who would want them all."

The company was also in talks with potential buyers, including trading firm RJ O'Brien, to sell its futures brokerage unit, the New York Times reported on its website. RJ O'Brien declined to comment.

SOME RESPITE

Knight got some respite on Friday after the Wall Street Journal reported the company had told brokers it had obtained a line of credit. A line of credit could address concerns that have surfaced as to whether Knight has adequate capital to maintain its trading.

The company would not confirm that report, however. Sources at other firms said that they had heard that news only from reporters.

Then several major customers, including retail brokerages TD Ameritrade and Scottrade, said they had resumed routing trades to Knight, which in 2011 was the largest U.S. retail market maker.

"After considerable review and discussion, we are resuming our order routing relationship with Knight," TD Ameritrade said in a statement.

Earlier on Friday, mutual fund giant Vanguard Group said it was still not routing orders through Knight, and according to people familiar with the situation, Fidelity Investments' brokerage also was continuing to avoid routing customer orders to Knight. Knight's trading volumes remained below usual levels on Friday.

For example, through Tuesday of this year, Knight accounted for 20 percent of the market making activity in shares of Apple, one of the most actively traded stocks on a daily basis. By midday Friday, Knight was the market maker for just 2 percent of the share volume, according to data from Thomson Reuters Autex, though market makers may not be reporting all trade data.

"A lot of buyside firms have got us on hold for now," said one Knight trader, who did not give his name because he is not authorized to speak to the press.

Market makers such as Knight buy and sell shares for clients and provide liquidity to the equity market by stepping in to buy and sell to insure orderly, smooth activity. The trading snafus have revived questions about the integrity of the equity markets.

'QUIET' ATMOSPHERE AT KNIGHT

Outside Knight Capital's Jersey City offices, security warned reporters not to harass employees. Police officers were also present, and reporters were told to stay off the company's property.

One staffer, toting a set of golf clubs, said, "I don't want to care," when asked how things were going.

Another called the atmosphere at work "quiet, very quiet."

One trader said staff had received no announcements from management as yet but described the atmosphere as "definitely better than yesterday," with people trying to carry on as usual.

But he noted the company's future remained in doubt.

"I thought by this morning we might have heard something. I think a lot of this stuff might get done over the weekend, maybe Monday the latest," he said.

Catharsis Ours

Saturday, August 4, 2012

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Revolving Credit

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Brendan McDermid/Reuters

Richard Drew/Associated Press

Andrew Harrer/Bloomberg News

Mark Lennihan/Associated Press

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