--Knight's loss from Aug. 1 trading error came in at $461.1
million
--Knight forms new risk committee at board level
--Business momentum returning despite difficult climate, CEO
says
(Updates with comments from Knight CEO.)
By Jacob Bunge and Saabira Chaudhuri
Knight Capital Group Inc. (KCG) has formed a new risk committee
of directors as the electronic trading firm continues to rebuild
following a catastrophic trading error in August, Knight's top
executive said Wednesday.
Technology staff at Knight continue to analyze the Aug. 1
trading mishap, which drove a $461.1 million loss for Knight and
forced the Jersey City, N.J., firm to seek rescue funding from a
group of customers and rivals.
"We need to re-establish our reputation for operational
excellence," said Thomas Joyce, chief executive and chairman of
Knight, speaking to analysts Wednesday on a conference call
discussing third-quarter results.
Knight on Wednesday reported a $389.9 million third-quarter loss
as the U.S. trading firm boosted the final cost of a
computer-trading glitch in August above its initial estimate.
The firm subsequently appointed a new chief risk officer, hired
International Business Machines Corp. (IBM) to review Knight's
systems, and installed additional measures to protect against
another such mishap, Mr. Joyce said Wednesday.
He said the episode was rooted in "a simple human error" in
preparing for a new trading service rolled out by the New York
Stock Exchange, and that momentum had returned to Knight's business
since the problem.
Knight had initially estimated the software glitch to cost it
$440 million, and the company said the tally revealed Wednesday
included final figures for trading losses and related costs.
The company's $389.9 million loss in the quarter to Sept. 30
compared with a profit of $26.9 million in the year-earlier period.
The per-share loss of $3.22 followed a 29-cent profit a year
earlier.
The latest quarter included a $143 million write-down related to
acquisitions of bond- and stock-trading units and an asset
management division, while the year-earlier period included a
pretax restructuring charge of 19 cents a share.
Trading losses led Knight to report negative revenue of $189.8
million in the third quarter, compared with $397.4 million a year
earlier. Analysts polled by Thomson Reuters forecast a loss of
$2.45 a share on negative revenue of $217 million.
As a broker and market-maker, Knight handles customers' trading
activity across a range of markets. Its electronic brokerage arm
suffered a software problem around the time the stock market opened
on Aug. 1, driving millions of shares' worth of mistaken
trades.
In the intense weekend negotiations that followed, Knight agreed
to give a group of financial firms effective control of the firm,
diluting the value of current holders. The company received a $400
million injection from the outside investors.
Despite the upheaval, Knight hung on to the number-two spot
among U.S. stock brokerage firms in the third quarter, according to
data tracker AutEx, but the company's performance was also weighed
by a broader slowdown in market trading and volatility that has
also hit rival traders and exchanges.
Knight reported a GAAP net loss of $764.3 million attributable
to common stockholders for the third quarter, or $6.30 cents a
share. Knight attributed $3.08 of the per-share deficit to the
issuance of preferred securities to its new investors, as
accounting rules required the company to treat the transaction as a
dividend paid by common shareholders to the preferred securities
holders.
The August trading loss accounted for another $2.46 of the
pre-tax, per-share loss, and 76 cents attributed to the asset
write-down, spurred by the slide in the firm's valuation and the
capital injection. Knight also paid about $1 million, or a penny a
share, in dividends to its new stakeholders, under the terms of the
preferred securities.
Stripping out extraordinary items, Knight estimated that it
earned about 1 cent a share for the quarter in net income.
Shares recently fell 2.3% to $2.52.
Write to Jacob Bunge at jacob.bunge@wsj.com
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