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Thursday, August 09, 2012

A Knight's Tale: A History of the LMM's Trading Crisis

Reported by InvestmentWires Staff, 

It all started on Wednesday, Aug. 1, when a software glitch cost Knight Capital Group a whopping $440 million loss. Since then, the leading market maker has seen the biggest ups and downs perhaps of its life, ranging from the sudden threat of bankruptcy and bailouts to flagging customer orders. Read on to get the full drama on the Knight disaster.

Wednesday, November 28

One of Knight's saviors, fellow market maker Getco, bids to buy Knight for $3.50 per share in a reverse merger, valuing Knight at about $635 million.


Tuesday, November 27

According to one report, Knight may turn to BlackRock for some kind of deal.

Meanwhile, multiple publications report that two other market makers, Getco and Virtu, could submit bids this week for all of Knight, not just the core market making business.


Friday, November 23

The Wall Street Journal reports that Knight is trying to sell its flagship market making business, with fellow market makers Getco and Virtu listed as possible circling bidders. In a memo picked up by Reuters, Knight CEO Tom Joyce insists that "there is no need for Knight to pursue a partnership, transaction or any other undertaking."


Wednesday, August 8

Tuesday's trading shows that, at least according to share volume, Knight is back on its throne as the second-biggest ETF trader in the market.

Meanwhile, the SEC announces that it plans to host on Sept. 14 a roundtable meeting to discuss how to improve the stability of high-tech trading systems and prevent glitches like Knight's. SEC chairman Mary Schapiro calls the roundtable an attempt to "keep pace with the rapid changes in market structure and technology over the last several years."


Tuesday, August 7

Philly.com reveals new victims of the Knight glitch. These ETFs that held stocks dragged down by the incident include Market Vectors Gold Miners ETF and ProShares Ultra Russell2000. Molycorp's stock also went into free fall. "This is an example of algorithms gone wild. They can't be left on autopilot," said Scott Freeze, founder of Street One.


Monday, August 6

Investors including Blackstone Group, Getco, TD Ameritrade, Stifel Nicolaus and Stephens come to Knight's aid, injecting $400 million into the troubled LMM. Under the terms of the deal, the board of the firm should be expanded by adding three new members, who should come from the group of investors comprised of Jefferies, TD Ameritrade, BlackStone, and Stifel, Nicoalaus & Company.

Meanwhile, some firms resume sending orders to Knight, including Vanguard and E*Trade Financial, although perhaps not all orders they used to send through the LMM. Vanguard and E*Trade's follow on the heels of TD Ameritrade Holding Corp and Scottrade resuming their orders on Friday. However, other firms like LPL Financial are not as eager to take the leap of faith.


Friday, August 3

The MutualFundWire speaks to several ETF execs, who mostly seem to report little to no effect on their ETF transactions as a result of the Knight blunder. Execs interviewed include president Robert Holderith of Emerging Global Advisors, president Brint Frith of Javelin Investment Management, and managing director William Rhind of ETF Securities.

The MFWire looks into who the other ETF market makers are. Competing with Knight are lead ETF market makers like Goldman Sachs — which serves as LMM for 339 ETFs versus Knight's 210 — as well as Sesquehanna Capital Group, IMC Chicago, Timber Hill LLC and Getco.


Thursday, August 2

The Knight debacle wreaks havoc on the ETF space at large. IndexUniverse reports that the average spread for an ETF trading less than 50,000 times per day has ballooned from 56 basis points to 94 basis points. Same for low-liquidity ETFs, where Knight is LMM, which saw the spread go from a 49 basis point average to 153 basis points.


Wednesday, August 1

Knight loses $440 million due to a software glitch. Firms stop routing customer orders through the LMM as well. Robert Rutschow, CLSA analyst, tells Bloomberg, “We believe Knight Capital is at risk of bankruptcy following the loss and so we are lowering our rating to sell. The company’s best option at this point is a sale.”  

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