Knight Confesses $440 Million Loss, Seeking Alternatives (KCG, BRK-A)

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Knight Capital Group Inc. (NYSE: KCG) has some explaining to do over its trading errors on Wednesday. This created major moves in many stocks and the NYSE canceled trades in at least six stocks. Now Knight is entering the confessional booth this morning with a press release trying to explain what happened.

One thing is going to irk market participants. The release said, “Clients were not negatively affected by the erroneous orders, and the software issue was limited to the routing of certain listed stocks to NYSE.” Go back and look at the early drop in Berkshire Hathaway Inc. (NYSE: BRK-A) shares yesterday and you might see just how widespread the damage was. It was of course not as bad as the Flash Crash of 2010, but it was no picnic either.

The report said:

Knight experienced a technology issue at the open of trading at the NYSE yesterday, August 1st. This issue was related to Knight’s installation of trading software and resulted in Knight sending numerous erroneous orders in NYSE-listed securities into the market. This software has been removed from the company’s systems.

Knight has also claimed that it has traded out of its entire erroneous trade position, which has resulted in a realized pre-tax loss of approximately $440 million. It said:

Although the company’s capital base has been severely impacted, the company’s broker/dealer subsidiaries are in full compliance with their net capital requirements. Knight will continue its trading and market making activities at the commencement of trading today. The company is actively pursuing its strategic and financing alternatives to strengthen its capital base.

A loss of $440 million is no walk in the park, particularly after such a widespread loss on Wednesday took the market cap down to $622 million. Shares closed at a multiyear low of $6.94 on Wednesday, and the situation is worse on Thursday as the premarket trading is down another 42% at $4.00 on the day.

How would you like to be interviewing for a job right now on the technology side of Wall St. and the last job position listed on your resume has the job title “Trading Software Engineer, Knight Capital Group” on it?

Needless to say, this counts as one serious earnings warning. Most likely it is going to be even far worse than that. It is very possible that this could be a total implosion of Knight Capital if no outside assistance comes in.

JON C. OGG