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Knight Capital surges 60% as trades return

August 3, 2012: 5:20 PM ET

Shares rebounded after two firms said they were back in business with Knight, which was facing $440 million related to a software glitch that affected almost 150 NYSE stocks.

Knight Capital Group's stock rallied nearly 60% Friday afternoon, after online brokerage firms TD Ameritrade (AMTD) and Scottrade said they'd resumed routing trades through Knight's system.

TD Ameritrade CEO Fred Tomczyk said the decision to resume trading came after "considerable review and discussion," adding that Knight has "long been a good and trusted partner."

Knight (KCG) was behind a series of bizarre moves in otherwise thinly traded stocks early Wednesday. For 45 minutes after the market opened, a software glitch in Knight's market-making unit affected how shares for some 150 NYSE-listed stocks were routed.

That led to unusual volume spikes in a number of stocks, including Bank of America (BAC), Alcoa (AA) and Caterpillar (CAT), among others.

Early Thursday, Knight said it would face a loss of $440 million from its software glitch. Knight is one of the major so-called market making firms that has the ability to execute trades on both major exchanges -- the Nasdaq (NDAQ) and New York Stock Exchange (NYX).

Investors were quick to punish Knight. In the span of two days, Knight's stock lost 75% of its value.

Questions immediately began swirling around trading floors about how long Knight could survive. The Wall Street Journal reported early Friday that Knight told its clients it had received a line of credit to continue operating through the close of trading. Knight was unavailable for immediate comment.

Shares were hovering just above $4 Friday afternoon, still sharply below the $10 they were trading at before the trading snafu.

Related: Why Knight lost $440 million in 45 minutes

E*Trade, which diverted its orders away from Knight Thursday, will not resume trading with the firm until Monday at the earliest, according to a person familiar with the matter. And Citigroup rerouted some of its order flow Thursday, said a second person familiar with the matter. Both E*Trade (ETFC) and Citigroup (C) declined to comment.

Fidelity, which also stopped routing its trades through Knight Thursday, had not resumed trading as of Friday afternoon, according to a source close the situation.

Related: SEC to high-speed traders: Make sure your technology works

Knight Capital said it is looking to raise capital in a statement released Thursday morning.  Knight is scrambling to sell the entire firm, pieces of it, or land a large cash investment before the market opens Monday, according to two sources familiar with the negotiations.

Knight has hired Sandler O'Neill to represent the firm in a sale, according to these people. Representatives from Sandler O'Neill declined to comment.
Potential buyers for Knight are currently weighing whether to buy the firm or to do so after a possible bankruptcy filing, said one of the sources familiar with the sales process.

Without fresh capital or a buyer, it's unlikely that Knight can survive. In a statement released Thursday morning, Knight Capital said "the company's capital base has been severely impacted" by the trading losses.

More buyers were emerging as Sandler helped Knight's executive scramble to hunt for buyers Friday, according to the second source. Private equity firms General Atlantic Partners and Lightyear Capital and competitors Virtu Financial and Citadel are said to be among the list of potential suitors. Representatives from Citadel, Virtu and General Atlantic declined to comment. Lightyear Capital did not return requests for comment.

A more robust auction process could make it less likely the firm files for bankruptcy. Still, buyers could be tempted to wait for Knight to file for Chapter 11 protection to insulate themselves from potential liabilities related to the firm's errant trades on Wednesday, said the first source. Buyers are struggling to understand even how much debt the company holds because Knight's debts include $375 million in so-called convertible debt, the first source said. With this type of debt, Knight's creditors may have the right to force the company to pay them immediately if a deal is struck.

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