Knight Explores Options on $440 Million Trade-Error Loss

Photographer: Scott Eells/Bloomberg

Traders work at the New York Stock Exchange (NYSE) on July 30, 2012. Close

Traders work at the New York Stock Exchange (NYSE) on July 30, 2012.

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Photographer: Scott Eells/Bloomberg

Traders work at the New York Stock Exchange (NYSE) on July 30, 2012.

Knight Capital Group Inc. (KCG) said losses from yesterday’s trading breakdown are $440 million, almost quadruple its 2011 net income and more than some analysts had estimated, and the firm is exploring strategic and financial alternatives. Its stock has lost 66 percent in two days.

Knight said it will continue its trading and market-making today as it considers its options. Yesterday’s issue was related to the installation of trading software and resulted in the company sending “numerous erroneous orders,” the Jersey City, New Jersey-based firm said today. The stock tumbled 50 percent to $3.46 at 9:36 a.m. New York time today.

Shares of Knight, one of the largest U.S. market makers, plunged 33 percent in record volume yesterday as investors speculated on how much the breakdown that sent stocks swinging as much as 151 percent will cost the company. Analysts at JPMorgan Chase & Co. estimated yesterday that Knight’s loss would be as much as $170 million, while Raymond James & Associates Inc. said the amount could be “hundreds of millions.”

“Although the company’s capital base has been severely impacted, the company’s broker/dealer subsidiaries are in full compliance with their net capital requirements,” Knight said today. “The company is actively pursuing its strategic and financing alternatives to strengthen its capital base.”

Photographer: Jin Lee/Bloomberg

A trader works on the floor of the New York Stock Exchange. Close

A trader works on the floor of the New York Stock Exchange.

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Photographer: Jin Lee/Bloomberg

A trader works on the floor of the New York Stock Exchange.

140 Stocks

The New York Stock Exchange reviewed trading in 140 stocks from Molycorp Inc. (MCP) to AT&T Inc. yesterday as the market’s 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.

Knight’s market-making unit executed a daily average of $19.5 billion worth of equities in June with volume of 3.1 billion shares, according to its website.

The $440 million loss compares with net income of $115.2 million in 2011 on revenue of $1.4 billion, data compiled by Bloomberg show.

‘More Monitoring’

“This loss is larger than we expected,” Rich Repetto, a New York-based analyst with Sandler O’Neill & Partners LP, wrote in an e-mail. “More monitoring and safeguards need to be built into these trading algorithms of both market makers and exchanges.”

As stock swings mounted yesterday, the company told some clients of its market-making business that a “technical issue” was affecting its systems and advised them to route orders elsewhere, according to e-mails from spokeswoman Kara Fitzsimmons yesterday. The issue was confined to that unit and its other operations were unaffected, she said.

The errors were caused by a malfunction in a trading algorithm, according to a person at Knight who asked to remain anonymous because the matter hasn’t been publicized.

While Knight reported July 18 that second-quarter earnings exceeded analyst projections, sales fell short by 1.7 percent. Cash and short-term investments rose 55 percent to $7.5 billion in the second quarter of 2012, and the company’s debt amounted to 46.4 times total assets, compared with 64 a year ago, data compiled by Bloomberg show.

To contact the reporter on this story: Whitney Kisling in New York at wkisling@bloomberg.net

To contact the editor responsible for this story: Lynn Thomasson at lthomasson@bloomberg.net

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