Knight Capital, Firm At Center of Wednesday NYSE Trading Glitch, On The Ropes

The firm at the center of a software glitch that prompted highly irregular trading patterns Wednesday morning in shares of more than 100 New York Stock Exchange issues is hanging on by a thread.

Knight Capital Group Inc. (NYSE:KCG) said Thursday a defective algorithm that had wreaked havoc on the equity markets a day earlier had caused the firm to enter into an "erroneous trade position" worth $440 million in losses. That amount of losses had caused enough of a capital shortfall that the firm was looking at "strategic and financing alternatives," the firm said early Thursday, telegraphing that the entire company might be up for sale or considering bankruptcy as a result of the debacle.

While the firm has not yet explained exactly what went wrong, an analysis by Chicago-based trading research firm Nanex LLC suggests the Knight's algorithm somehow went into a berserk pattern where it was continually buying 100-share lots of various ticker symbols and immediately selling them at a lower price. The computer program was seemingly design to execute the orders as fast as every 25 milliseconds, or 40 times each second. The results: The firm lost nearly $10 million per minute.

Nanex called the algorithm "a system that's very efficient at burning money" and described its execution as "crazy."

'Technology Breaks'

In an interview with Bloomberg early Thursday, Knight CEO Tom Joyce seemed to deflect immediate criticism of the company, noting "technology breaks" and that the event Wednesday "was an anomaly." While also seemingly not accepting personal responsibility, saying he "stayed away from the day-to-day minutia," he at least attempted to put on a brave face as his company flagged, noting the was "proud of the fact" the firm had advised its clients to issues early Wednesay and "got them out of harm's way."

"We are open for business," Joyce reiterated.

That assertion seemed less likely as the day wore on and reports leaked out that clients were deserting the firm left and right. Prime brokers Sterne Agee & Leach Inc. and Concept Capital Markets, asset manager Fidelity Investments and mutual fund giant Vanguard Group were among the firms that confirmed Thursday they were no longer doing business with Knight, as did online brokers TD Ameritrade Holding Corp. (NYSE:AMTD) and E*Trade Financial Corporation (NASDAQ:ETFC) and large bank Citigroup Inc. (NYSE:C)

"With the events of yesterday, you have to question if this is the beginning of the end for Knight," Christopher Nagy, founder of the consulting firm KOR Trading, told the New York Times.

It is unlikely Knight will lose all of its clients, as the firm accounts for more than 10 percent of the market-making in U.S. equities and various analysts noted it was the large, more conservative firms who could easily go elsewhere that had pulled away from the firm.

'Bullets Are Flying'

Still, seeing some customers walk out the door was only one of the many indignities Knight faced Thursday.

Egan Jones, a major rating agency, downgraded the firm's bonds to "extremely speculative" CCC-rating, noting Knight's losses amounted to about four times what the firm earned "in a good year" and would require the firm to raise about $600 million.

Later in the day, details leaked that one of the firm's regulators, private CME Group Inc. (NASDAQ:CME) was "monitoring" the firm. The Financial Industry Regulatory Authority, an independent regulatory authority for the securities industry, also said it was working to "review the impact resulting from Knight Capital's technology issue."

"It's a war zone here; bullets are flying. I'm just trying to survive," Fox Business quoted an unnamed senior executive within Knight as saying.

Sell Or Go Bust

Indeed, with the firm's own stock dropping more than 75 percent in the span of two days, it appeared Knight was entering survival mode late Thursday, trying to hold on long enough to be rescued or go bankrupt. According to Fox Business, the firm requested an emergency loan from JPMorgan Chase and Co. Thursday and, presumably rebuffed, was looking at bankruptcy options. The Wall Street Journal, for its part, was reporting the company was in talks with trading firm Virtu Financial about a possible deal.

Shares of Knight Capital Group Inc. closed Thursday at $2.58, down 75.02 percent over the span of two trading sessions, and were down a further 46 cents in after-hours trading.