Knight Capital saved by $400m deal

A GROUP of investors rescued Knight Capital Group in a $400 million (€323 million) deal that keeps the embattled leader in US equities market-making in business, but comes at a huge cost to existing shareholders.

There were immediate signs the rescue gave Knight back some of the market confidence it had lost, as two large brokerages resumed routing orders through the firm and new data showed volumes picking up from last week’s lows.

Blackstone Group, rival market maker Getco and financial services companies TD Ameritrade Holding, Stifel Nicolaus, Jefferies Group and Stephens Inc purchased preferred shares for what works out to be a 73 per cent stake in the company, Knight said.

Knight was the largest US provider of retail market-making in New York Stock Exchange and Nasdaq-listed stocks, buying and selling shares for clients. It also provides liquidity to equity markets by stepping in to buy and sell stocks, using its own capital to ensure orderly activity.

Knight shares fell 20.7 per cent to $3.22 in trading yesterday afternoon.

Knight chief executive Tom Joyce, in an interview with CNBC, said it was “absolutely” the best deal that could have been struck, and there was no better alternative among the roughly 90 approaches Knight received.

Those who held Knight shares before yesterday will feel the pain of the company’s rescue. The massive dilution that accompanies the deal means their stakes are worth just a fraction of what they were days ago. Because so many Knight shares traded hands late last week, those hurt worst may be the ones who recently bet on its survival.

The rescuing companies will buy preferred stock convertible at $1.50 each with a 2 per cent dividend to save Knight, which was brought to its knees last week by a software glitch that caused errant trading in dozens of stocks.

The preferred shares are convertible into about 267 million common shares, Knight said in a US Securities and Exchange Commission filing.

As part of the deal, the investor group will take three board seats, with TD Ameritrade and Blackstone expected to get one each, a source familiar with the situation said. The New York Stock Exchange said it would temporarily transfer Knight’s market-making responsibilities on more than 500 stocks – and related Knight employees – to Chicago-based Getco until the recapitalisation is complete. – (Reuters)