--Rescue plan will help fill hole left by errant trading last
week
--Knight entered into 'securities purchase agreement'
--Investor group includes Jefferies, TD Ameritrade and Getco,
sources say
(Updates with NYSE information and TD Ameritrade advisory
information.)
By Saabira Chaudhuri, Jacob Bunge and Jenny Strasburg
Knight Capital Group Inc. (KCG) on Monday confirmed that the
embattled brokerage had agreed to a $400 million rescue plan that
would help fill a hole left by errant trading last week.
The Jersey City, N.J.-based firm told regulators in a filing
Monday that the firm had entered into a "securities purchase
agreement" on Aug. 6, selling $400 million worth of 2% convertible
preferred stock in itself to a group of investors. Those securities
will be convertible into about 267 million shares of common stock
in the company. Knight currently has about 89 million shares
outstanding.
The deal was anticipated to be "consummated" Monday, according
to the filing from Knight.
In a statement, Knight said as a result of the loss it
"experienced reduced order flow and liquidity pressures, and its
capital base was severely impacted."
Knight shares were down 33% to $2.72 in recent premarket
trading. The stock closed Tuesday, before the glitch, at
$10.33.
Separately, the New York Stock Exchange's parent company, NYSE
Euronext (NYX), took precautions over the weekend as Knight's
funding remained an uncertainty. The NYSE shifted responsibility
for handling trading in more than 600 securities, normally overseen
by Knight, to rival trading firm Getco LLC. The responsibility
relates to so-called designated market makers on the Big Board and
NYSE MKT, formerly Amex.
Like Knight, Getco is a big market-maker in NYSE-listed
securities, standing in to buy and sell at publicly quoted
prices.
The reassignment of Knight's responsibilities to Getco is
temporary and in the interest of "market integrity," NYSE said in a
statement Monday morning. Once Knight's funding comes through,
oversight will go back to Knight "in a timely manner."
Knight typically handles some $20 billion of shares a day
through the New York Stock Exchange, much of that for retail
brokerages that serve small investors. Early Friday, the
17-year-old firm told customers it had received a line of credit to
allow it to stay open for business, but some of the firm's largest
clients continued to steer their business to rivals.
The investor group includes the bank Jefferies Group Inc. (JEF),
brokerage giant TD Ameritrade Holdings (AMTD) and Getco, according
to people close to the discussions. Stifel Financial Corp. (SF),
Blackstone Group LP (BX) and Stephens, the Arkansas investment
bank, were also among potential investors, the Journal said.
Barclays PLC (BCS) is advising TD Ameritrade on the deal, according
to a person familiar with the matter.
The deal ensures Knight remains afloat and able to trade, but
could also presage a breakup of the company, according to a
research note Monday from J.P. Morgan Chase & Co.
"The company was already trading in the mid-single digits given
the lack of transparency, and valuations as a going concern will
likely fall meaningfully from there," wrote analyst Kenneth
Worthington. "Given this perspective, we expect investors will look
to value the [Knight] pieces, expecting the parts to be divested at
more opportunistic times."
Knight's request that it be allowed to cancel many of last
Wednesday's errant trades was rejected by Mary Schapiro, chairman
of the Securities and Exchange Commission, forcing Knight to unload
the stock it had bought, incurring the $440 million loss. Goldman
Sachs Group Inc. (GS) bought the stock in a bulk lot at a discount.
The errant trades were fired off a day after Knight installed
software related to the launch of a New York Stock Exchange
platform aimed at attracting more retail investors.
--Saabira Chaudhuri contributed to this article.
Write to Jacob Bunge at jacob.bunge@dowjones.com