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 »
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.
Traders at Knight Capital are already making calls for jobs elsewhere as the stock hits multi-decade lows, Gasparino reported. Knight employed a 1,418 people as of the end of the second quarter. “It’s a war zone here; bullets are flying. I’m just trying to survive,” a senior Knight executive told FOX Business. “It’s going to be hard for Knight because this is their distinctive competence. This is what they do,” said Robert Steven Kaplan, a Harvard professor and former vice chairman at Goldman Sachs. “If they make a mistake like this that costs this much money, it casts out on their entire franchise and capability.” [FBN]
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]
Remember the fight that broke out at the New York Athletic Club last month, which a witness described as a “nondiscriminatory ragematch” involving “young people, old people, girls, members, and nonmembers,” which started as a tiff over a woman and “escalated into a brawl involving three fighting wolfpacks,” wherein “tables were overturned or moved to the room’s periphery to crate a lion’s pit for the battle,” a “fat pudgy kid came out of nowhere, laid out a larger man with a blow to the head and was tackled by a crowd,” approximately two noses were broken, and the police made three arrests? Oddly, it looks unlikely that the guy who did “the most damage” (to people’s faces) will be walking away with a slap on the wrist. Read more »