Last week, the software of Knight Capital Group (KCG) inadvertently purchased shares of several American companies without any human input. Later, the company incurred massive losses when they dumped the shares purchased. It caused a ripple of concern across Wall Street and made headlines over last few days.
The glitch caused the company’s share price to tank, and rumors about bankruptcy began to surround the market making company.
Over the weekend, Knight Capital closed a deal with private investors to raise $400 million, which allowed the firm to open its doors on Monday. The rescue team includes TD Ameritrade, the Blackstone Group, Getco and Stifel & Nicolaus. The stock was still down over 20% following the announcement on Monday although Knight was able to resume its day-to-day operations, which includes market making responsibilities (buying and selling of securities for clients).
The rescue plan does significantly dilute the value of the common shareholder’s stock. Once the 2% preferred shares are converted into KCG stock, investors will own 73% of the company. Additionally, the investors have occupied 3 board seats at Knight.
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On the bright side, Knight Capital was able to avoid a bankruptcy. Another positive is that clients and taxpayers did not have to pay for this rescue. The crisis at Knight Capital was a significant loss to shareholders. Additionally, concerns about automated trading have resurfaced following the faulty algorithm used by Knight in the aftermath. Some people have raised concern over a lack of human element in the trade filing process.
Do you think KCG can recover and get back to business as usual following the rescue plan?
Use the Turbo Chart to compare performance of KCG and the S&P 500 over the last month:
1. Knight Capital Group, Inc. (KCG, Earnings, Analysts, Financials): Provides access to the capital markets across multiple asset classes to buy-and sell-side firms, and corporations, as well as offers capital markets services to corporate issuers and private companies primarily in the United States. Market cap at $397.75M, most recent closing price at $4.05.
(Written by Ryan Horch)
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