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Goldman Bought Knight Capital Stock Before Malfunction

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Aug. 15 (Bloomberg) -- Goldman Sachs Group Inc. and Vanguard Group Inc. increased holdings in Knight Capital Group Inc. during the second quarter before the market-making firm lost $440 million on a computer malfunction this month.

Brokerage and asset-management units at Goldman Sachs increased their stakes in Knight Capital by 73 percent to 2.39 million shares, valued at $28.5 million at the end of June, according to a regulatory filing yesterday by the New York-based bank. The subsidiaries’ convertible-debt holdings climbed by $2.5 million to $60.5 million, the filing shows.

Vanguard and Dimensional Fund Advisors LP in Austin, Texas also added shares of Knight during the quarter, according to data compiled by Bloomberg. They and Goldman Sachs all rank among Knight’s top 10 shareholders, the data show.

Knight, whose market-making unit executes 10 percent of U.S. equity volume, has plunged more than 70 percent since a computer malfunction bombarded the market with errant orders Aug. 1. The firm turned to Goldman Sachs that day to buy it out of trading positions, a person with knowledge of the matter said last week.

Vanguard was among financial firms that temporarily avoided processing brokerage orders through Knight in the days after the incident.

Money managers who oversee more than $100 million in equities must file a Form 13F with the Securities and Exchange Commission within 45 days of each quarter’s end to show their U.S.-listed stocks, options and convertible bonds. The filings don’t show non-U.S. securities or how much cash the firms hold.

Spokesmen for Goldman Sachs, Dimensional and Valley Forge, Pennsylvania-based Vanguard, declined to elaborate on the quarterly filings.

To contact the reporter on this story: Laura Marcinek in New York at lmarcinek3@bloomberg.net

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net