Joyce Faces Knight Extinction as Computers Erase Profit

Knight Capital Group CEO Thomas Joyce
Thomas Joyce, chairman and chief executive officer of Knight Capital Group Inc. Photographer: Jonathan Fickies/Bloomberg

Thomas Joyce, the chief executive officer of Knight Capital Group Inc. who turned around the hobbled market maker a decade ago, is now fighting to keep the firm afloat after a trading breakdown spurred losses bigger than its profits in the last two years.

“Tom’s a really solid guy, a good leader,” Paul Roy, the founding partner of London-based investment firm NewSmith Capital Partners LP, said in a telephone interview. Joyce worked at Merrill Lynch & Co. through 2001 with Roy, who was head of the global equity markets division. “They reacted speedily and they’ve diagnosed the issue and quantified the problem. Whatever he’s now putting into place, I’m sure it’s not going to happen again.”

Knight hired Joyce, 57, just as regulations that had concentrated trading in U.S. stocks on the biggest venues were changing to promote competition. Joyce boosted profit and sales by expanding the market-making business and pushing it toward electronic trading, relying on computers that could execute transactions more cheaply than humans on the floor of the 220-year-old Big Board.

Errors related to trading software on Aug. 1 caused losses of $440 million and Knight, whose market-making unit executes about 10 percent of U.S. share volume, saw its stock plunge 75 percent in two days. Analysts at CLSA Credit Agricole Securities and Stifel Nicolaus & Co. said bankruptcy was a possibility should the Jersey City, New Jersey-based firm fail to get financing.

Nasdaq Losses

The company had already suffered from technology mishaps, losing $35.4 million from trading Facebook Inc. shares after the social-networking service’s initial public offering in May was marred by delays and malfunctions. Joyce, whose net worth has shrunk by $9.5 million this week, was one of the most vocal critics of Nasdaq OMX Group Inc.’s handling of the IPO, calling the exchange’s plan to compensate customers for losses “underwhelming at best.”

The New York Stock Exchange reviewed trading in 140 stocks from Molycorp Inc. to AT&T Inc. on Aug. 1. Transactions that occurred during the height of the volatility were canceled in six securities, whose prices swung at least 30 percent in the first 45 minutes.

“It’s somewhat ironic that he has problems within the same area that Nasdaq had with the Facebook IPO,” Dan Teed, president of Wedgewood Investors Inc. in Erie, Pennsylvania, said of Joyce in a telephone interview. “I don’t know if it’s karma, or it’s just a situation where you’d better take care of your own house before you start criticizing other houses.”

‘Large Bug’

The Aug. 1 disruptions were triggered by what Joyce called “a bug, but a large bug” in software as the company, one of the biggest U.S. market makers, prepared to trade with a NYSE program catering to individual investors.

As the swings mounted, the company told some of its market-making clients that a “technical issue” was affecting its systems and advised them to route orders elsewhere. The issue was confined to that unit and its other operations were unaffected.

The issues that affected Nasdaq and Knight are “apples and baseballs when you compare them,” Joyce said in an interview on Bloomberg Television’s “Market Makers” program yesterday. “Technology breaks. It ain’t good. We don’t look forward to it. What happens next is what matters, how you escalate it. We’re very proud of the fact that we escalated it directly to our clients and got them out of harm’s way.”

Design Flaw

In the May 18 debut of Facebook, a design flaw in software used to auction shares delayed the open while Nasdaq’s efforts to fix the problem prevented trade reports from being sent out for more than two hours. Joyce blamed Nasdaq and called its mishandling of the IPO a setback for the securities industry.

“Nasdaq made decisions that created this problem that the industry suffered through, and it’s up to Nasdaq to create a solution,” he said at a June 7 conference hosted by Sandler O’Neill & Partners LP in New York.

Knight was founded in 1995 and grew during the bull market of the late 1990s into one of the biggest traders of technology stocks. It hired Joyce in May 2002 after annual revenue plunged 46 percent during the prior year. It had 1,423 employees at the end of 2011, according to a regulatory filing, growing through more than 15 mergers and acquisitions since 2000.

Profits, Sales

Joyce increased profits and sales by building the firm’s market-making business and taking advantage of regulations that spread trading across more than 50 venues including electronic communications networks and dark pools. Revenue reached a record $1.36 billion in 2011, more than doubling in nine years, while earnings increased to $115.6 million. Shares climbed 85 percent during his tenure as CEO through the end of last month.

The company earned $337.1 million in pretax income during 2011 and 2010, according to data compiled by Bloomberg.

‘He was able to turn it around,’’ Matthew Andresen, co-CEO at Headlands Technologies LLC, a market-making firm based in Chicago and San Francisco, said in a phone interview. “When he took over that company, they were essentially a manual trading operation. He overhauled that firm into a real electronic trading powerhouse. There’s not a lot of precedent for doing that.”

Joyce joined Knight from Sanford C. Bernstein & Co., where he was the head of global trading of the firm’s institutional brokerage business for less than a year. He’d previously spent 15 years at Merrill overseeing electronic trading and worked on the company’s $914 million acquisition of Herzog Heine & Geduld Inc. in 2000.

Harvard Baseball

“I’ve known Tommy for 25 years and he’s as honest as the day is long,” said Buzzy Geduld, chief executive officer of Cougar Trading in New York, who sold his firm Herzog Heine & Geduld to Merrill. “If you want to be in the market making business, they’ve got a real franchise,” he said.

Joyce, known as TJ, lives in Connecticut with his wife of 33 years, Lisa Joyce, and their three children. He grew up in Weymouth, Massachusetts, near Boston, where his father worked as a lineman at Boston Edison, and his mother was a homemaker. He graduated from Harvard College in 1977 with a degree in economics. At Harvard, he was captain of the baseball team and a linebacker in football, earning him induction into the college’s athletic hall of fame.

He serves on the board of directors of Special Olympics of Connecticut and Alfred E. Smith Memorial Foundation. He joined the Ronald McDonald House New York board of directors in October 2010, according to Knight’s website.

Joyce hobbled back to work after having knee surgery on July 31. His personal wealth declined by $9.5 million over the past two days, based on his reported stock holding in Knight, according to data compiled by Bloomberg.

“His main criticism of Nasdaq was that not only did they bungle it, they tried to make their customers eat the losses,” James Angel, a finance professor at Georgetown University’s business school in Washington, said in a telephone interview. “It is one of those little ironies in the business that these glitches could happen to anyone. It’s happened to Nasdaq, it’s happened to Knight.”

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