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September 1, 2012

Knight Rebounds After Cash Infusion

By Michael Scotti

Knight Capital Group's roller-coaster week and recovery is one for the record books. After a huge software glitch last month threw the company's future in doubt, an investor group bailed it out. Volume returned to the giant market maker just one day later.

Many wondered if the Jersey City, N.J.-based firm would survive a $440 million trading loss it suffered from an algorithm gone awry on the New York Stock Exchange on Aug. 1.

In the days after, Knight's future was still in question. But a few brokerage firms-including customers such as TD Ameritrade and Stifel Nicolaus & Co.-came to the rescue on Aug. 6 with the cash infusion that kept Knight in business. Other investors included Getco, Blackstone Group, Stephens Inc. and Jefferies Group.

The day after the cash injection, Knight's trading volumes in the Russell 1,000 jumped. Clients appeared to regain confidence. On Aug. 7, it finished as the No. 7 broker, executing 163 million shares, up from No. 11 the day before. That's when it recorded 86.4 million shares, according to Bloomberg's broker ranking. The move came one day after receiving a cash lifeline of $400 million from new investors.

Its rise in rank trading Russell 1,000 stocks continued throughout the rest of the week. Knight reached No. 4 by Friday, Aug. 10, trading 191.8 million shares. That was about twice the shares in the Russell 1,000 it traded on Monday, Aug. 6.

The life-saving cash also helped the firm regain its footing as a designated market maker on NYSE. Following the trading loss, Getco took over the firm's business. Knight got its DMM status back on Aug. 13.

Though many clients initially stopped trading with Knight, by the following week they were back. Each day that week (Aug. 6 to Aug. 10), Knight was ranked No. 1 in total trading volume, when including ETFs and pink sheets, according to Bloomberg's broker ranking data. Bloomberg receives its execution data from brokers, who self-report.

Because Knight never left the No. 1 spot when accounting for all stocks, observers say that ranking only highlights the firm's importance to the industry as a liquidity provider.

A Knight Capital spokesman confirmed that business had returned, but declined to comment further. The return of business initially may have been aided by a letter that Knight sent to clients from chief executive Tom Joyce. The letter reiterated the firm's commitment to its clients and that the cash infusion had put the company back on firm financial footing. The firm later took out a full-page ad in the Wall Street Journal thanking its clients for their support.

Several industry sources said they were surprised how quickly Knight's business rebounded. One buyside trader said he likes to access Knight's dark pool through the firm's algos. The benefit, he said, is the ability to trade against retail order flow.

Another industry source said Knight was "integral to the marketplace." That's because it trades in so many different capacities-from market maker to agency broker and in various asset classes. "If you look at advertised trades," the source said in reference to its institutional business, "they're top three in just about every name."

Chris Willox, head trader at Fenimore Asset Management, which runs $1.5 billion in equities, doesn't trade with Knight. But he expressed relief, as well as surprise, that volume snapped back so quick. "It's great for Knight," he said. "For the employees, I can imagine what they had to go through."

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