Courtesy of Olly Ludwig/IndexUniverse
Knight Capital (NYSE: KCG), the biggest ETF market maker in the U.S., is seeking financing after saying that a trading glitch involving its systems on Wednesday that affected 148 stocks will result in a $440 million pre-tax loss. The company’s stock was down 45 percent in early morning trade.
“The company is actively pursuing its strategic and financing alternatives to strengthen its capital base,” Knight said on Thursday in a press release, stressing that it will be business as usual for the company in the wake of the wayward trading episode.
The swiftly moving story is one of the more astonishing developments in the world of electronic securities trading, where Knight plays a dominant role. Industry sources say that whatever reputational challenges Knight faces at this very moment pale in comparison to the attractiveness of its business, or at least particular pieces of it.
The Jersey City, N.J.-based firm, the biggest ETF U.S. market maker, said in the press release that while the whole episode “severely impacted” its capital base, its broker-dealer units remain in compliance with net capital requirements.
*Editor insert: MarketsMuse spoke with one industry expert, who requests no mention of his name, but framed the Knight story as follows: “This is exactly the type of episode that should cause institutional fund managers to re-think how/where their orders are executed. Relying on a single market-making firm–which by definition, is counter-intuitive to the notion of best execution–is a recipe for disaster. The right approach is to use a qualified, agency-only liquidity aggregators– firms that focus on capturing best prices by canvassing a broad list of market-makers. The latter approach addresses the PM’s fiduciary obligation, and significantly mitigates dependence on one market-maker, particularly one that may have been perceived for being “too big to fail.”
The Accident That Happened
On Wednesday, Knight saw its stock drop by a third due to the wayward program trading involving its system. The episode was reportedly triggered by a human error that caused hundreds of trades to be executed in minutes instead of over a longer period.
“An initial review by Knight indicates that a technology issue occurred in the company’s market-making unit related to the routing of shares of approximately 150 stocks to the NYSE,” the company said in a prepared statement on Wednesday.
For the full IndexUniverse coverage, click here