Breakout

Knight Capital Gets $400M Rescue, But Problems Still Lurk

Breakout

Friedrich Nietzsche once wrote, "that which doesn't kill me makes me stronger," and nowhere is that more true today than at Knight Capital (KCG), the New Jersey-based trading and financial services firm that narrowly avoided collapse following a $440 million trading snafu, thanks to a consortium of investors who claimed a 70% stake in exchange for their rescue.

As devastating and costly as their "software glitch" was for the now diluted  shareholders, the reaction on the street to how the crisis was handled is being called a "shining example" and an outstanding job.

"It's a testament to what investors think. I actually think it's a very bullish argument for Knight itself," says Ken Polcari, managing director ICAP, referring to the company as a "very very very good franchise" that is well respected and widely used across the street.

However, the same sense of bonhomie can not be found when it comes to the regulatory response to the matter, which in this case refers to the Securities and Exchange Commission and its Chairman Mary Schapiro.

"Every time there's a tech failure, whether it was Facebook (FB) and Nasdaq (NDAQ), whether it was the BATS debacle that happened, they always come out after the fact and say, 'well, we're going to sit down and talk about it.' The Flash Crash - it took them seven months to come up with the answer," Polcari says, arguing that Knight's ordeal showed yet again "the operational risk" that we still have in the markets today.

While Knight CEO Thomas Joyce asked the New York Stock Exchange and the SEC for a Mulligan, so to speak, neither was willing to bust any additional trades beyond those in six stocks which had seen 30-plus percent price swings.

While that hard-line response is in keeping with the letter of the law, it is hard to argue that it keeps to the spirit of the law, since one of the primary intentions of regulatory changes that followed the Flash Crash was to make it easier to nullify clearly erroneous trades - such as these - and not incentivize those seeking only to exploit the system.

"In the end, I think what turned out to be a difficult situation for Knight," Polcari predicts, "will turn out to be a hell of an opportunity for the consortium that invested in it."

Time will tell, but at least for now, Knight can say that it is still alive (albeit worth about 70% less than it was a week ago) and investors can say they've survived another crisis, but have no assurances that it won't happen again.

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