Knight Asks Clients to Send Orders Again as Power Fixed

Knight Capital Group Inc. (KCG), one of the largest U.S. market makers, told customers they could resume sending orders after resolving an electrical outage that shut down its equities trading yesterday.

A failure of backup power at its headquarters in Jersey City, New Jersey, drove the company to stop accepting new orders for stock trades yesterday amid a blackout following Hurricane Sandy. The issue has been fixed and systems are operating normally, according to a memo from Knight, which almost went bankrupt in August after a computer error flooded the market with unintended orders. The company is open for “all equities,” spokeswoman Kara Fitzsimmons said by e-mail.

Knight is one of dozens of Wall Street firms affected by power outages after Hurricane Sandy flooded parts of New York and New Jersey on Oct. 29. Citigroup Inc., the third-largest U.S. bank, said its office at 111 Wall St. in Manhattan will be unusable for weeks and that a building housing senior capital- markets executives lost power.

“Knight Capital Americas LLC, has identified and resolved the power outages that were experienced earlier today,” the company said yesterday in a circular to clients. “Please feel free to route back at your earliest convenience.”

Generator Power

The broker told employees today that generator power resumed at about 2 p.m. yesterday and it began “limited trading.” While the fuel supply for generators hadn’t been depleted, the company asked clients to send order elsewhere because “at lower levels of fuel generators can experience disruptions,” the notice said.

“Knight never lost power to its critical trading systems due to double redundancies built into its system,” the company said. “Battery power was utilized during the generator down time.”

Knight is now operating on its “normal power supply,” it told customers after the close of trading today.

Yesterday Knight stopped handling client business in its institutional sales and trading unit and market-making group in all exchange-listed and over-the-counter stocks and in options, Fitzsimmons said by phone yesterday.

Hotspot, BondPoint

“Power went down at about 11:45,” Fitzsimmons said. Other regional offices continued to trade, including Knight’s institutional fixed-income business in Greenwich, Connecticut, she said.

Knight said in a separate statement after the market closed that it had also asked customers using its Knight Direct, Hotspot FX and BondPoint services to send orders elsewhere until the company regained a power supply. Trading through these systems had resumed yesterday, Fitzsimmons said.

U.S. equity markets opened yesterday after the storm forced exchanges to shut for the first two days of the week, the only back-to-back closures related to weather since 1888. The New York Stock Exchange’s trading floor operated on backup power and will do so through today if necessary, Joe Mecane, head of U.S. equities for NYSE Euronext, said in a phone interview.

Nasdaq OMX Group Inc.’s data center in Carteret, New Jersey, was also running on backup power, according to a notice disseminated yesterday. The exchange company can refill the generators, which have 72 hours’ worth of fuel, every evening and has a backup data center in Ashburn, Virginia, Robert Madden, a company spokesman, said by phone.

Power Issues

“Due to a building emergency (power issues), Knight Capital Americas is asking you to seek an alternate destination for the order handling and execution of your OTC, Options and Listed orders until further notice,” said a memo to clients, which was confirmed by Fitzsimmons yesterday. “All computer interfaces with Knight will be shut down with no new orders, both by phone or electronic, being accepted at this time.”

The market-making unit of Citadel LLC saw an increase in order flow from retail brokers following Knight’s withdrawal from equities at midday, according to Katie Spring, a spokeswoman for the Chicago-based company. She said Citadel’s trading systems are working properly.

Some of the larger retail brokers routed trade requests to other firms once Knight stopped trading.

Individual Investors

Fidelity Investments sent orders from individual investors to other market makers including Citadel and Goldman Sachs Group Inc. after Knight’s generators failed, according to Steve Austin, a spokesman for the Boston-based asset manager. Knight handled 38 percent of immediately executable orders from Fidelity Brokerage Services LLC for companies listed on the NYSE in the third quarter and 18 percent for those listed on Nasdaq Stock Market, the investment firm said in a report about its order-routing practices.

“We haven’t had any service disruptions for our clients,” Kim Hillyer, a spokeswoman for retail broker TD Ameritrade Holding Corp. (AMTD) in Omaha, Nebraska, said by phone. The broker sent customer orders to other market makers when Knight’s systems stopped accepting orders. “It’s very easy for us to move order flow,” she said. “Trading has been pretty normal.”

TD Ameritrade sent 9 percent of immediately executable orders for NYSE-listed companies and 10 percent for those on Nasdaq to Knight in the third quarter, according to a brokerage report.

A technology error by Knight on Aug. 1 bombarded equity exchanges with erroneous orders, leading to a $457.6 million loss. The broker, one of the largest traders of U.S. shares by volume, was at the brink of insolvency as customers routed orders elsewhere and its shares plunged 75 percent in two days.

The company is now more than 70 percent owned by the companies that bailed it out with a $400 million cash infusion the following week. Almost all retail brokerage clients have come back to the firm, Chief Executive Officer Thomas Joyce has said.

Knight shares, which fell as much as 8.4 percent during trading, closed up 0.4 percent to $2.63. The stock traded for higher than $10 before the August mishap.

To contact the reporters on this story: Nina Mehta in New York at nmehta24@bloomberg.net; Saijel Kishan in New York at skishan@bloomberg.net

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

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