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Knight Capital Seems to Have Fallen From its Steed

Nov. 2, 2012
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Hurricane Sandy was devastating for many people living on the East Coast. Yet, many businesses were devastated as well. While shutting down operations for a day may not seem critical, Knight Capital felt a sharp blow, as this is simply the latest struggle it has had to face over the course of a rough year.

Trading Glitch

As a market maker, Knight Capital executes hundreds of thousands of trades per day from some of the largest brokerages, such as TD Ameritrade and E-trade. When Knight decided to install new software, there was a conflict with the outdated code which sent an enormous number of trades to the NYSE before a human could interfere. Once Knight was made aware of the error, they had to incur a massive loss in unloading their position. The total damage? $461.1 million.

Hurricane Sandy

Yesterday afternoon, Knight announced that power was back to its New Jersey headquarters, and that it was once again processing orders. After trading had been closed all of Monday and Tuesday due to the hazardous hurricane, Knight had to close shop early on Wednesday. Since their backup generator was running low on fuel, they told clients to direct all orders elsewhere until the situation could be dealt with. These seems perfectly reasonable, but Knight has come under some criticism since they avoided transferring their trading operations to their backup data center in Purchase, NY.

Whether or not this was the correct move to make, we cannot be sure of. Obviously, people at Knight were only comfortable with continuing operations as normal when their primary system was guaranteed to function. But the investors that stepped in to keep Knight afloat after the massive loss in August must be starting to wonder how stable the trading firm is.

Fearless Leader?

The captain always goes down with his ship. For Thomas Joyce, Knight Capital’s CEO, that may not be the case. Though he has spend the last decade leading Knight, his employment contract expires in December, and he has been in talks with E-trade regarding possibly becoming their new CEO. Though the online brokerage had a disappointing third quarter, E-trade is a household name with over 2 million brokerage clients in the U.S., and may be somewhat more appealing at the moment for Joyce. In August, E-trade asked Steven Freiberg to leave, two years into a four year contract. Their Chairman of the Board, Frank Petrilli, is currently acting-CEO until a permanent Chief Executive is found.

Galloping Ahead

While the individual investor will never have to deal directly with Knight Capital, they may want to be way of companies that are overdependent on the firm. A primary example is TD Ameritrade. Not only do they direct a large percentage of their trades to Knight, but they also invested a large amount of money into the market maker when the trading glitch wiped out Knight’s cash.

Of course, we can’t be sure of what the future holds. Perhaps Knight will ride into battle and overcome these obstacles. Or maybe the future is looking somewhat brighter for Citadel and UBS.