(By Rich Bieglmeier) So you think you had a bad day when one of your stocks misses earnings and dumps in your portfolio. Imagine how the folks at Knight Capital Group, Inc.
) must be feeling.
Yesterday, a "bug" in newly installed software caused the market maker to take erroneous trading positions, which wiped out $440 million of its capital in just "minutes". That's more than the company is worth based KCG's current price.
There must be a lot of hangover sufferers at 545 Washington Boulevard in Jersey City, New Jersey – can you hand me the Advil?
This morning, Knight management put out the following statement, "The company is actively pursuing its strategic and financing alternatives to strengthen its capital base." Reuters report that one of the alternatives is a request for financing from JPMorgan Chase & Co. (JPM). Oh the irony – one rogue trader to another.
Let's sidestep briefly to define what a market maker does. For most investors, they are most likely familiar with the bid and ask prices for stocks. The market maker buys on the bid (lower price) from sellers of the stock and sells at the ask (higher price) for buyers. Market makers profit from the difference a.k.a. bid ask spread. Most market making firms handle transaction for retail or individual investors and institutional accounts alike. Because the typical spread is small, especially on more active stocks, market makers make their money on volume.
Size is what makes Knight Capital interesting following their screw up, somebody will want to pick up that order flow. According to NASDAQ.com, as of June 2012, Knight was the seventh largest provider of liquidity for NASDAQ securities and number eight for total volume.
For NYSE securities, KCG ranked fourth and fifth, respectively, and ARCA Securities Knight held the seventh and fifth slots. For the quarter ended March 31, 2012, daily market-making volume was $22 billion for Knight, down from $25.4 billion the previous year. On average, the company traded 3,345,900 shares a day.
At the end of the March quarter, the trading company had $363.3 million in cash and cash equivalents on the books. As of March 31, 2012, KCG had current assets, which consist of net assets readily convertible into cash less current liabilities, of $1.07 billion. They just burned nearly half of it up, in a matter of moments.
A little math here would be helpful, liquidate everything and take the $440 million hit, and you are left with $630 million. Of course, everybody on Wall Street knows what Knight is holding and will make sure KCG doesn't get current market value. Those sharks are cutthroat.
So let's give the $630 million a 20% haircut, and there is $504 million left. Knight Capital has 89.62 million shares outstanding, which translates to $5.62 per share. While Wall Street is running away from KCG shares again today, another market maker could be eyeballing a bid. All they might have to do is ask.