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March 1, 2013

Knight Capital's Latest Loss

By Editorial Staff

A huge liquidity provider's dream of becoming a clearing powerhouse is now officially dead.

Knight Capital Group, in the process of being bought by GETCO, recently shuttered its correspondent clearing division and laid off a few dozen of its employees, including its head, Steve Sadoff, according to industry sources.

Tom Joyce, Knight Capital

Knight chairman and CEO Tom Joyce said Sadoff "performed tremendous work in leading Knight's technology and operations and we thank him for his service." The decision to discontinue Knight's correspondent clearing services came at the same time that Knight has opted to consolidate its electronic equities sales teams, Joyce said.

Knight was going ahead with plans to clear for others when the events of last summer caused it to reverse course and close the clearing operation. On Aug. 1, the giant liquidity provider sustained a $547.6 million loss owing to a newly introduced algorithm, which sent out waves of erroneous orders to the nation's exchanges. Knight had to be bailed out by a group of six firms led by GETCO, which is in the process of buying Knight. The dreams of becoming a clearing giant became a distant memory for Knight.

Actually, it was two and half years ago that Knight officials told CQ&D they were dispensing with the clearing services of Merrill Lynch's Broadcort and going to self-clearing.

"We have heard from people that they would like to deal with us on a direct basis," said Chris Pento, a managing director for Knight (see CQ&D, Spring 2010).

Knight officials estimated the immediate benefits of the self-clearing would be $20 million a year.

However, they went to self-clearing for the same reason other brokerages were considering it: It would give them greater control over trades. A Knight spokesman said it will continue to self-clear.

But beyond self-clearing, Knight had ambitious goals. With so much volume and an extensive wholesaling network, it hired dozens of new employees and was building new systems, expecting to tap the huge potential of clearing trades for others.

Back in 2010, one analyst predicted CQ&D that Knight's new business of clearing for others would "do very well." Others said it would have trouble taking away business from the powerhouses of the institutional clearing world.

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