While owners of Knight stock saw the value of their shares shrink after a 61 percent plunge since July 31, the bailout averted a threat to the equity market where it is one of the biggest partners for smaller traders. The company accounted for 29 percent of the average monthly volume in U.S. equity trading by individuals in the first quarter, according to a June 7 presentation.
The dilution to its equity leaves “very little” for existing shareholders, while likely ensuring the company’s survival, according to analysts at JPMorgan Chase & Co., who predicted Knight eventually may be broken up.
“We expect investors will look to value the KCG pieces, expecting the parts to be divested at more opportunistic times,” the JPMorgan analysts wrote in a note.
Stifel Nicolaus sent 38 percent of its market orders in New York Stock Exchange-listed shares to Knight last quarter, and TD Ameritrade did 9 percent, according to a public execution disclosure statement. Knight is the dominant firm in equity wholesaling, the business of executing orders off exchanges primarily for retail brokerages, according to Larry Tabb, chief executive officer of research firm Tabb Group LLC in New York.
The New York Stock Exchange and NYSE MKT temporarily switched custodial responsibility for approximately 524 NYSE and 156 NYSE MKT-listed securities from Knight’s designated market maker unit to Getco, according to a statement today. The reassigned securities will be returned to Knight after the completion of its recapitalization plan, NYSE Euronext said.
“We did it because there was question about whether Knight would reach a deal over the weekend,” Larry Leibowitz, chief operating officer at NYSE Euronext, said in a phone interview. “We didn’t want to walk into Monday and have there be any doubts,” he said. “This allowed Knight to focus on what they really needed to do, which is get this infusion. It looks like it’s coming together at exactly the right time. But who knows what was going to happen.”
Obtaining additional capital to fund businesses such as market making was viewed as necessary to keep Knight afloat. Analysts at CLSA Credit Agricole Securities wrote last week that bankruptcy was a possibility if the firm failed to get financing.
Knight’s trading loss was bigger than the $365 million cash balance it reported as of June 30 and exceeded its market value of $398 million as of Aug. 3, data compiled by Bloomberg show.
The sale of convertible securities dilutes existing shareholders because they can be exchanged for stock at a preset price. The deal allows investors to buy new shares in Knight at about $1.50 apiece.
Knight worked with advisers to line up financing after its shares plunged 75 percent over two days last week to $2.58 in the biggest drop since it went public in 1998. The stock climbed 57 percent the next day to $4.05 as some customers said they were routing stock orders back to the firm.