Knight Fight

The firm that lost $450 mln in 40 minutes is suddenly a hot property

November 28, 2012
November 28, 2012

Knight Capital Group, the market middleman that lost $450 million in 40 minutes after a trading glitch this summer, is up for grabs among some of its rival automated market-markers. The scramble has sent Knight’s share price up more than 13% today, to $3.37 at 1:05 P.M. ET.

Chicago-based high frequency trading firm Getco has made an offer for Knight at $3.50 a share in a complicated work of buyout art. Getco would first turn Knight into a holding company, then issue itself shares, buy the company, and retire a portion of those shares. (That bit of M&A kabuki would give Getco more incentive to grow Knight’s business, according to a former executive cited by Bloomberg.) Knight CEO Tom Joyce would take a backseat to Getco CEO Daniel Coleman in the arrangement.

But Knight’s board may find another, simpler deal more attractive. Fox News reported that Virtu plans to offer $3.00 per share for Knight—entirely in cash. In this package, Joyce would remain part of a three-man executive team. The buyout would still be made at a premium to Knight’s share price at the close of trading yesterday, which was $2.97.

High-frequency trading firms and automated market-makers like Knight, Getco, and Virtu have risen to prominence over the last few years as investors move into new asset classes and trading systems become increasingly automated. Both Getco and Virtu covet Knight’s high order flow and the higher volume of fees that comes with it.

Critics fear that new, highly complex trading systems could make markets unstable—as Knight’s trading glitch showed in August—or could favor algorithmic and institutional traders with better computer systems than individual traders. Knight, facing bankruptcy, regained its footing only after a $400 million bailout from a group of Wall Street market-making and investment firms, which included Getco.

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