Believing strongly in Knight Capital Group Inc.'s importance to the financial industry, Ron Kruszewski, the chief executive of Stifel Nicolaus, made the executive decision to put down money to rescue the besieged financial firm from insolvency.
"We put money at risk on a very quick basis, in a day, effectively, but we felt that it was important that Knight survive," Kruszewski said in a telephone interview with On Wall Street. "As an industry, we- Jefferies, Stifel, Stevens - just went in there. We could have gotten more, but we felt it had to be an industry solution."
Knight was reeling from $440 million in losses after a massive technology glitch. According to Knight, the problem arose at the open of trading at the NYSE on Wednesday], Aug. 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," the company stated in a press release. Knight responded by trading out "its entire erroneous trade position, which has resulted in a realized pre-tax loss of approximately $440 million," and which "severely impacted" the company's capital base." As a result, Knight's stock fell 75% over two days, dropping to $2.58, and the company's future looked uncertain.
A number of financial firms, such as Blackstone Inc., Jefferies Group Inc., TD Ameritrade Holding Corp., GETCO LLC and Stephens Investment Holding Inc., stepped in over the weekend to inject a total of $400 million into the firm, taking on a 73% stake in the company through freely tradable shares, according to Bloomberg, which has helped keep Knight's Jersey City, N.J.-based operation afloat. Yesterday, Thomas Joyce, Knight's chairman and chief executive officer, in a prepared statement expressed gratitude for the new financing. The software that led to the August 1, 2012 trading issue was removed from the company's systems, Knight said in a statement on its website.
Coming on the heels of a number of other market missteps such as the botched Facebook and Bats IPOs, and accusations of LIBOR rigging, the news deals another blow to investor confidence, Kruszewski said.
"You combine the flash crash and what happened with Facebook and Libor and Bats, and it weighs on people's perceptions that the markets are fair. The average investor doesn't understand; 'Computer Glitch Costs Money' going to be on balance a negative to people wanting to invest," Kruszewski said.
An advocate for safer and more secure trading, Kruszewski has used his position as one of Knight's major investors to speak out against the "rush for speed" that he says contributes to these mishaps.
"I invested in a company that did this, and I'm going to have things to say about that. I believe that there's been too much emphasis put on speed and computers and not on the fact that these systems need to bat a thousand," he explained. "The errors are big, and I think there needs to be more care because you unleash computers on the market system."
Even so, Kruszewski remains optimistic that Knight's mistake is not indicative of the company's culture and potential for success. He calls the debacle a "black swan" event given that no customers lost money and Knight's day-to-day structure is still effective.
"I think it's a good management team," Kruszewski added. "It wasn't like their system just went haywire. They were trying to put in a new system completely unrelated and it didn't work. They don't forgive it and there's going to be an investigation, and I'm sure there will be improvements, but the day to day stuff has been working fine."
Prior to the deal, St. Louis-based Stifel Nicolaus had a long-standing relationship with Knight as both a competitor and a customer. Stifel sent 38% of their market orders in NYSE shares to Knight, according to Bloomberg, and Kruszewski has known Knight's CEO for some time.
Kruszewski anticipates that relationship to continue essentially business as usual following the deal except, "I might read their press release more closely now," he quipped.