Knight ducks insolvency with $400 million investment

Aug. 6 (Bloomberg) -- Knight Capital Group Inc. received a $400 million cash infusion through the sale of convertible securities after trading losses spurred by a software failure drove the market maker to the brink of bankruptcy.

Investors agreed to buy preferred stock that will be convertible into approximately 267 million common shares, the company said today. Getco LLC, the automated trading firm backed by General Atlantic LLC, Blackstone Group LP, brokerages Stifel Nicolaus & Co. and TD Ameritrade Holding Corp., and the investment banks Stephens Inc. and Jefferies Group Inc. are investing, according to a statement from the company.

Knight, whose market-making unit executes about 10 percent of U.S. shares, has been fighting for survival since a computer breakdown spewed orders through stock exchanges Aug. 1 and led to a $440 million loss. The mishap spurred calls in Congress to examine whether increasing automation is damaging the integrity of the U.S. equity market, the world’s largest with $16.4 trillion in share value.

“It’s not too surprising that among the sources of financing for Knight in their emergency are some of their customers,” David Whitcomb, founder of Automated Trading Desk LLC, a competitor of Knight that is owned by Citigroup Inc., said in a phone interview from Honolulu. “Their customers want to keep a diverse set of market makers going so as to maintain a high level of competition.”

Shares Halted

Knight shares were halted for the release of the news. The new preferred stock may be converted into common shares at a price of $1.50 a share, compared with the closing price of $4.05 on Aug. 3.

The new investors in Knight will own about 73 percent of the company once the 2 percent preferred shares are converted into common stock, according to data compiled by Bloomberg.

Knight said in today’s statement that while the issuance of the convertible preferred stock would normally have required approval from shareholders, its audit committee determined that the delay would “seriously jeopardize the financial viability of Knight.” Knight said it will mail shareholders a letter to explain.

The Aug. 1 software malfunction “depleted Knight’s capital base and in turn precipitated a loss of customer and counterparty confidence and liquidity crisis that, if not immediately addressed, would have threatened Knight’s ability to continue to operate.”

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