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Knight gets a boost, helped by loyal clients

After a grisly two days, Knight Capital got a few breaks. Relatively speaking, anyway.

The battered trading firm, whose software glitch briefly sent stock trading into chaos on Wednesday, reportedly got a new line of credit, which was crucial after the company drained its resources to pay for Wednesday's debacle. The stock, which had shed three-quarters of its value over the previous two days, jumped 57 percent. And many of Knight's clients, rather than heading for the door, instead closed ranks around the company.

Granted, those positive developments are just a small oasis in a desert of tense problems. Not all of Knight's customers will be so easy to please. It almost certainly needs to come up with more funding sources, and could still end up being forced to sell itself to survive. The head of the Securities and Exchange Commission on Friday publicly called the incident "unacceptable."

Knight Capital Group, based in Jersey City, N.J., is a trading firm that takes orders from big brokers like TD Ameritrade and E-Trade. It then routes them to the exchanges where stocks are traded, like the New York Stock Exchange.

The company has been taking a beating since Wednesday, when a problem with a newly installed piece of software wound up funneling erroneous orders for some 140 stocks to the market for the first 45 minutes of trading. That caused shares of some stocks to swing wildly.

Those 45 minutes have been devastating for Knight, which has scrambled to reassure clients and investors that it's got things under control.

Knight said Thursday it would have to spend $440 million — nearly four times what it earned last year — cover the mistaken trades. That expense, it said, had "severely impacted" its capital base, and the company said it was looking at "strategic" alternatives, business-speak for saying it might sell itself. The Wall Street Journal reported Friday that Knight received a credit line from an unnamed party that would allow it to remain open for the day. Knight didn't return a message seeking confirmation.

The stock, which had plunged from $10.33 to $2.58 over Wednesday and Thursday, is still far from being made whole. It shot up $1.47 to $4.05 Friday.

The client reaction so far has been more muted than outraged. Knight has said that none of its clients were hurt, and that the faulty software has been removed. Knight says it notified clients immediately after it noticed the problem, and had them stop routing trades through its systems on Wednesday.

E-Trade and Vanguard were still not trading through Knight by Friday, but said they'd continue to assess the situation. A spokesman for Vanguard, which works with Knight through its brokerage arm, called Knight "a longtime and valued partner." TD Ameritrade, which on Thursday had been performing test runs before placing orders with Knight, announced that it would resume normal trading.

Joe Fox, CEO of the online brokerage Ditto Trade, said Knight had worked hard to try to smooth over the problems it had caused. His company had also halted its trading through Knight but planned to resume "once they straighten out their problems," Fox said.

"There's no such thing as perfect technology," he added. "It's all about how you mitigate the situation."

Still, there's no denying the trauma that Knight has caused, at least to itself. Said Fox: "I'm more concerned for them as a company."

Knight's blunder revives a thorny debate in the financial system about the merits of high-speed trading, where lightning-fast mathematical models trade stocks in milliseconds and, as recent mistakes indicates, strain the system that is supposed to handle them.

The foul-up was the latest in a string of high-profile technical problems that have left some investors convinced they can't trust the financial markets. The biggest was the "flash crash" in May 2010, when a computer problem caused the Dow Jones industrial average to drop nearly 600 points in five minutes. The most recent was Facebook's debut on the Nasdaq stock exchange in May, when technical problems at Nasdaq kept some investors from knowing if their trades had gone through.

It's also a reminder of how quickly fortunes can change on Wall Street: After the Nasdaq flub, Knight was one of Nasdaq's most outspoken critics.

Mary Schapiro, the SEC chairwoman, said in a statement that "Wednesday's event was unacceptable."

"Reliance on computers is a fact of life not only in markets everywhere, but in virtually every facet of business," Schapiro said. "That doesn't mean we should not endeavor to reduce the likelihood of technology errors and limit their impact when they occur."

Duncan Niederauer, CEO of the New York Stock Exchange's parent company, called Knight's problem an "unfortunate situation" and praised Knight CEO Thomas Joyce for being upfront and accountable.

Knight's glitch happened when it was installing software for a new trading program at the NYSE, but both Knight and the NYSE said the NYSE was not to blame.

Niederauer acknowledged that investors are losing confidence in the system and spoke of "the need for reforms in market structure in the United States." But he also laid some of the blame on regulators.

"We have talked about this publicly that the growing fragmentation and uneven regulations across what is now hundreds of competing platforms continue to fuel a crisis of confidence among investors," Neiderauer said. "It is just too hard for them to understand how the markets work."

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