The future of Knight Capital Group Inc.(NYSE:KCG) hangs in jeopardy because of the heavy losses that it has incurred on Wednesday, which amounted to a whopping $440 million! They are desperately trying to get firms to route customer orders to them again, but so far they have not managed to acquire their prior clients’ trust. Currently, they are also in active discussion about getting finance from alternative sources.
Apparently, TA Associates has signed a non-disclosure contract with Knight, which might lead to an investment or acquisition. Sandler O'Neill, advisor on behalf of Knight has approached some other firms for resuming orders, but most firms have put their foot down as it would be hugely risky at this stage.
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Another source has cited that Government attorneys are inspecting Knight’s actions to check if it is in violation of a new rule that has been formulated to offer adequate protection to markets from rogue algorithmic computer trading programs. The rule states that brokers will opt for risk control measures to prevent the execution of erroneous trades or orders that exceed pre-set credit or capital thresholds.
The outcome of Knight Group has caused panic for other brokers, who are furiously supervising trading systems and strategies, so that the same fate does not befall them. Knight has written to its clients that their money is safe as it has been kept separately from their funds. Knight might sell of its futures brokerage unit to trading firm RJ O'Brien.
Speculations are rife that Knight has secured a line of credit, which might help to keep the trading firm afloat, but positive confirmation has not been available. After a crushing blow dealt by Vanguard Group and Fidelity Investments, that they will not route customer orders to Knight, there is some respite, because TD Ameritrade Holding Corp.(NYSE:AMTD) and Scottrade have started doing business with them once more.
The Knight Group crisis has not only made things uncertain on Wall Street, but it has raised a serious question about the integrity of equity markets.
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Shares of KCG had solid recovery on Friday and closed higher by 57% to $4.05 after slumping 3-4th of its value in the previous two trading sessions. The stock is still down 61% from Tuesday’s close.