Knight getting costly $400 million lifeline after trading debacle

Mon Aug 6, 2012 7:19am EDT
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By John McCrank and Carrick Mollenkamp

NEW YORK (Reuters) - Knight Capital Group Inc looks set to enter into a $400 million financing deal with a group of investors, allowing the trading firm to open its doors Monday after a crippling $440 million loss, although it will come at a steep cost to shareholders, sources familiar with the situation said.

Such a deal would help Knight continue to operate and avoid further disruption and uncertainty for its brokerage clients, which include firms such as TD Ameritrade, Vanguard and Fidelity Investments.

An announcement on the deal is expected by early Monday, one source said.

Knight's shareholders have had to pay a steep price to keep the firm afloat following 45 minutes of software-induced mayhem last Wednesday that led to the loss and a massive decline in customer confidence. Shares worth $10.33 last Tuesday night may now be worth just $1.50, an 85 percent drop.

The capital lifeline is coming from investors that include private equity firm Blackstone Group, Chicago market-maker Getco - in which private equity firm General Atlantic is a shareholder - as well as financial services firms TD Ameritrade, Stifel Nicolas, Jefferies Group Inc and Stephens Inc, according to the sources.

The investment is expected to be made through convertible preferred stock, which will have a conversion price of $1.50 per share and carry a coupon of 2 percent, the sources said. The consortium will own 70 percent to 75 percent of Knight following the conversion, one source said.

Officials at Knight, Blackstone, TD Ameritrade, Jefferies, Stifel and General Atlantic declined to comment. Officials at Getco and Stephens were not immediately available for comment. CNBC earlier reported the news of the deal.

Knight's problems started early on Wednesday when a software glitch flooded the New York Stock Exchange with unintended orders for dozens of stocks, boosting some shares by more than 100 percent and leaving the company with the trading loss.   Continued...

A Knight Capital logo is seen on a trader's jacket on the floor of the New York Stock Exchange August 1, 2012. REUTERS/Brendan McDermid