I give you a tiny puzzle. Getco offered to buy Knight Capital a month ago for $3.50 a share, in the form of a cash-stock-election structure complicated by the fact that Getco is not (yet) a public company and so the value of your stock election is a bit of a mystery. Today the Knight board accepted Getco’s revised offer, which is similar but provides $3.75 per share, so I guess the mystery has been cleared up to its satisfaction; there will eventually be a merger proxy/prospectus so soon it will be cleared up to everyone’s satisfaction or possibly dissatisfaction.
The puzzle: if Getco is increasing the cash paid for Knight shares by 25 cents, or 7.1%, then it should also increase the value of the share election by 7.1%, to keep things in balance. And in fact it seems to have done so: while the original offer said that the tangible book value per share of newco would be $3.50, the revised one says: Read more »
With Knight Capital Group’s days as an independent entity waning, the Jersey City brokerage’s employees are preparing for the future, so sayeth Charles Gasparino. Read more »
I’m a sucker for a little puzzle and I guess this Knight-Getco-Virtu thing qualifies, so let’s just bop around doing some silly arithmetic about it. Knight, the trading firm that slow-burn blew itself up this year, is looking for buyers, and Getco and Virtu seem to be those buyers. On the table we have:
- An offer from Getco to buy half of Knight’s shares for $3.50 in cash and leave the other half outstanding in a new merged Knight-Getco, and
- A rumor of an offer from Virtu to buy all of Knight’s shares for $3.00 in cash.
Virtu’s deal is worth $3.00, I guess. Getco’s deal is more complicated, but it’s got to be worth … at least $1.75, no? Plus whatever a (half of a) share in the new company is worth. What is that? Well it’s a proportionate amount of
- Whatever Knight is worth, plus
- Whatever Getco is worth, minus
- The cash that is paid out to cash out half of the shares, all divided by
- The number of shares in newco.
Plus synergies, etc., which are probably a thing. Rapacious prop traders + naive retail order flow = synergies!
Anyway you can start on the Getco deal’s value by mathing out tangible book value numbers. Read more »
Knight Capital Group Chief Executive Officer Thomas Joyce said in a letter to clients yesterday the company is “in good standing” with clearing firms and its broker-dealer units have sufficient capital. Joyce also said the post-tax loss stemming from Knight’s trading error was about $270 million, compared with a previously reported pretax loss of $440 million. The letter comes a week after Knight, one of the biggest market-making firms in the U.S., was driven to the brink of bankruptcy after a technology malfunction spewed orders into the market by mistake. [Bloomberg, earlier]
The Knight Capital convertible preferred documents are a mess. The basic structure is quite nice: Knight’s new investors are getting a preferred stock that, eliding the details below, pays a 2% dividend, converts into common at $1.50 a share, automatically converts once the common has traded above $3 for 60 days, and can be converted earlier at the holder’s option. Sensible enough: the holders get a liquidation preference if the company goes belly-up in the next few weeks; otherwise they get common that they can get out of quickly via an already-filed registration statement.
But that’s not quite right, since the investors are actually getting two sorts of preferred stock, A-1 and A-2, the first of which are convertible now and the second of which won’t be until, um, Saturday. The NYSE has rules saying that you can’t sell more than 20% of your common stock at below market prices without shareholder approval – to prevent you from screwing shareholders by selling control of the company to someone at sweetheart prices. This was a problem because Knight needed to raise more than their market cap, selling 73% of the company for $400mm. To do this, they took advantage of a NYSE rule that once looked quaint but has since oh say 2007 become all the rage in certain capital markets circles, Rule 312.05, which provides an exception to the shareholder approval requirement “upon application to the Exchange when (1) the delay in securing stockholder approval would seriously jeopardize the financial viability of the enterprise and (2) reliance by the company on this exception is expressly approved by the Audit Committee of the Board.”
But even that doesn’t get them out of the woods, because it requires the company to mail a letter about the stock issuance to shareholders and wait 10 days before issuing the common stock. This part still looks quaint – a letter! 10 days! – and its purpose is a little unclear to me, since stockholders can’t really do anything with this notice but silently fume at the series of mistakes that led them to receive it. I guess they can sue. Shareholders like to sue. And since this rule would otherwise be a good way for companies to screw shareholders by selling control at sweetheart prices, there’s no harm in giving shareholders ten days to get together and sue to block a bad deal. Read more »
…says former CEO who may or may not be authorized to speak for the place. Ya hear that would-be buyers? You can piss all the way off. Read more »
This should make you feel better:
Knight Capital Group currently remains in compliance with its net capital requirements following the firm’s $440 million trading loss, a front-line financial regulator said Thursday.
The Financial Industry Regulatory Authority, an independent regulatory authority for the securities industry, said in a statement Thursday that it’s working with Knight and other regulators to “review the impact resulting from Knight Capital’s technology issue,” which occurred in early trading Wednesday.
“Finra is closely monitoring the firm’s capital, and, at present, they are in compliance with net capital requirements,” said Finra spokeswoman Nancy Condon in a statement. “Finra currently has examiners on site” at Knight’s Jersey City, N.J., headquarters, she said.
Reassuring! Some context: Read more »
Knight Capital has “all hands on deck” and is in close contact with clients and counterparties as it tries to weather trading errors that cost it $440 million, Chief Executive Officer Thomas Joyce said. Joyce said it’s “hard to comment” on discussions with creditors as Knight stock extended a two-day plunge to 70 percent and the firm explored strategic and financial alternatives following a loss almost four times its annual profit. The problems were triggered by what Joyce called “a bug, but a large bug” in software as the company, one of the largest U.S. market makers, prepared to trade with a New York Stock Exchange program catering to individual investors. “Technology breaks,” Joyce said in an interview on Bloomberg Television’s “Market Makers” program with Erik Schatzker and Stephanie Ruhle today. “It ain’t good. We don’t look forward to it.” [Bloomberg]
Yesterday I and others pointed out that, while UBS was not alone in getting screwed by Nasdaq failures on Facebook, it was alone in losing 10x as much as other, more competent market makers like Knight Capital, and ha ha ha. This apparently had a jinxing effect:
Knight Capital Group Inc., one of the largest trading firms, told brokerages to send their orders elsewhere and was probing a software problem, according to people involved in the matter. U.S. exchanges said they were examining potentially erroneous trading in more than 100 securities that saw big price swings or unusually high volume. Knight saw a fifth of its own market value wiped out. …
The system error and reports of irregular trading stoked suspicions that trades had been accidentally duplicated via computer algorithms, rather than the problem being contained to one server, as has happened in the past, traders said.
Knight is down ~21%, vs. ~4% yesterday for UBS and its costly Facebook fail, a useful reminder that focusing on perfecting your market-making business may make you less likely to fuck it up, but when you do fuck it up it goes far worse for you. That’s maybe some sort of a metaphor for high-frequency electronic market-making generally, which it will not surprise you to learn is coming in for some flak today.* Algorithmic high frequency trading makes it more likely that your small trade will be executed quickly and cheaply, but it also makes it more likely that larger orders will go horribly awry as prices move away from them.
Which is why this coincidence (?) pointed out by the Journal is kind of tantalizing: Read more »
At a brief court appearance yesterday, prosecutors said they want one of the three men — Peter Doran, 28, of Glen Head — to serve a half year in jail for throwing punches during the April 13 fracas. Doran allegedly threw the first roundhouse against another guest at the NYAC’s usually sedate second-floor Tap Room. Prosecutors also said they want a second man, Matthew O’Grady, 31, of Glen Cove — accused of joining in on the fisticuffs — to serve eight days of community service. Both O’Grady and Doran said through their lawyers yesterday that they have no interest in pleading guilty to misdemeanor assault and taking the DA’s recommended sentences. “That’s no offer at all,” said O’Grady’s lawyer, Richard Leff. Prosecutors haven’t even made an offer to the young broker charged with causing the most severe injuries, Colin Drowica, 30, of Glen Head. Drowica allegedly punched another guest hard enough to fracture his eye socket. “We are conducting our own investigation,” said Drowica’s lawyer, Isabelle Kirshner. [NYP, earlier]