Lights Out?

We all need a little Knight-in-shining-armor, sometimes.

Addendum: The-Knight-in-shining armor turned out to be Goldman Sachs. Interestingly, “Goldman Sachs is also the biggest owner of Knight’s $375 million of 3.5 percent convertible bonds, according to data compiled by Bloomberg. Those notes are trading about 80 percent of face value, according to prices reported by Trace.” (Bloomberg) ~ Ilene

Knight Considering Bankruptcy, Looking at 363 Asset Sale

Courtesy of  Zero Hedge

This may be it. Via Fox News:

  • VIRTU OUT OF BIDDING FOR KNIGHT CAPITAL
  • KNIGHT’S JOYCE CONSIDERING BANKRUPTCY REORGANIZATION
  • KNIGHT LOOKING AT ‘363’ REORGANIZATION TO SELL ASSETS
  • KNIGHT LOOKING TO EMERGE AS VIABLE COMPANY

363 Asset sale? This is what we said earlier when we reported on the rumors of a sale to Virtu: “Will it happen? Maybe. Although we doubt it – why pay for equity value when one can pick up the functioning assets in a Chapter 363 asset sale which also sticks the creditors with all the crappy assets?” Sure enough. Sadly, what this means for the company 1,500 employees is that about 80% them will be out of a job due to an algo gone wild. And to them we have been warning about the impact of HFT for the past 3 years.

Perhaps now that people’s livelihoods are about to destroyed even the porn-addicts at the SEC will finally take this matter seriously.

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Background on Knight’s costly software misadventure:

This Is What Happens When An HFT Algo Goes Totally Berserk And Serves Knight Capital With The Bill

By Zero Hedge

We also all know that one should buy low and sell high. At least that is what human traders  are taught, and that is what they attempt. Because if one consistently does the opposite, one will simply run out of money. Well, the opposite is precisely what the berserk algo in Knight’s Market Making group may have done if Nanex, which has done a forensic analysis of one of the trades in question, is correct. In other words, instead of at least attempting to provide liquidity via limit trades, Knight’s algorithm acted as a market order… gone horribly wrong. As the third chart below shows what the algo did with furious repetition and steadfast consistency was to buy at the offer, and sell at the bid, in other words buy high and sell low. Over and over and over and over. As Nanex laconically notes, “In the case of EXC, that means losing about 15 cents on every pair of trades. Do that 40 times a second, 2400 times a minute, and you now have a system that’s very efficient at burning money.”

Which also means that by not DK’ing several hundred million prints, the NYSE may have just thrown Knight under the bus, because the market maker is suddenly on the hook for tens if not hundreds of millions in inverse market making profits.

Full article here >

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Knight Capital’s Software Glitch Costs it $440 Million

By Jeff Macke

Wild stock price swings in the market yesterday are costing one trading firm a multimillion dollar headache today. Financial services company Knight Capital Group (KCG) has seen its stock price plummet another 50% today after announcing losses incurred due to erroneous trades entered on Wednesday morning. Nearly 150 stocks that trade on the New York Stock Exchange (NYX) experienced extreme price swings and unusually high volume due to the firm’s computerized trades. Knight had to unwind the positions that it accidentally bought, causing the firm to take an estimated loss of $440 million –more than the company’s second quarter revenue. Knight blames a faulty software installation for the mistake which has since been corrected. The entire event, which lasted for about 30 minutes, ended up costing the company roughly $10 million a minute.

[...]

Markets need outside regulation. Left to their own devices traders will find the weakest participant and steal them blind. There are a million different reasons to be suspicious of equities, traders, banks, the exchanges and the largely impotent regulatory body attempting to police the entire marketplace. Rules are going to be manipulated and abused anywhere there’s competition. There’s a reason regulators exist, just as there’s a reason they test for drugs at the Olympics; people break rules to win. (my emphasis)

Full article >

See also: 

Knight Shares Slide as Clients Pull Back After Glitch

Several big clients have stopped trading with Knight Capital Group Inc. in the wake of the electronic-trading glitches that have prompted the brokerage firm to pursue a deal or additional financing as it faces a $440 million loss because of Wednesday’s snafu.

The Jersey City, N.J.., trading firm’s stock plunged $4.36, or 63%, to $2.58 in Thursday trading as it said it was pursuing ways to “strengthen its capital base” through outside financing or other potential deals. Stock losses on Wednesday knocked $333 million off the firm’s market value.

What a Knight Buyer Would Get

Knight says it’s looking for strategic alternatives. What might be the appeal to buyers, in whole or in part?

Finra: Knight Capital in Compliance With Net Capital Rules

Knight’s stock tumbled more than 60% Thursday amid concerns about Knight’s trading loss. The firm is seeking a capital infusion or a merger partner as it reels from the loss and trading partners pull back, according to people familiar with the matter.

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