Trading Loss Yanks Knight Q3 Into Red

Knight Capital, the biggest ETF market maker in the U.S., posted a $389.9 million third-quarter net loss due to the trading fiasco it suffered on Aug. 1 that risked causing the entire firm to collapse until it received an emergency infusion of capital.

The results included pretax losses of $461.1 million related to the trading debacle and to subsequent related costs, as well as a $143 million noncash pretax charge related to the write-down of goodwill and intangible assets, Knight said today in a press release. Before income tax benefits, that loss totaled $602.9 million.

The trading debacle will go down as one of the more astonishing episodes in the world of electronic securities trading, where Knight plays a dominant role. The crisis centered on individual stocks, but affected some exchange-traded funds too, notably the Vanguard Utilities ETF (VPU), which traded well above its net asset value in the first 45 minutes after the market opened on Aug. 1.

Industry sources said it appeared that program trades that should have been executed over a period of days—perhaps even weeks—were instead completed in a matter of minutes, taxing the company’s financial resources beyond what it could handle on its own. It dodged bankruptcy by dint of a $400 million cash infusion by selling convertible preferred stock to a number of buyers.

Overall, the third quarter 2012 GAAP net loss attributable to common stockholders was $764.3 million, or $6.30 per share. That per-share loss figure includes $3.08 linked to the issuance of the convertible preferred stock; $2.46 related to the trading glitch; and another 76 cents in asset-impairment costs.

Before all those costs, the company eked out operating profit “on a non-GAAP basis” of $817,000, 1 cent a share, Knight said.

“Obviously, consolidated financial results were negatively impacted by the trading losses, related expenses and subsequent non-cash write-downs,” Knight’s Chairman and Chief Executive Officer Tom Joyce said in the press release. “We are gratified though that, if one backs out these items, we made a small profit on an operating basis.”

In the same year-earlier quarter, the Jersey City, N.J.-based trading firm earned $26.9 million, or 29 cents per diluted share. Those results included a pretax restricting charge for severance, write-down of assets, and assets totaling $28.6 million, or 19 cents a diluted share.

“Net negative revenues” for the current-year third quarter were $189.8 million, including $457.6 million related to the trading losses. That compares with revenues $397.4 million in the third quarter of 2011.

“The recapitalization restored the firm’s liquidity and capital, Knight’s market share in U.S. equities substantially rebounded, and we’ve undertaken measures to enhance processes and controls,” Joyce said.


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