Knight Capital (KCG) Sends Investors Mixed Signals, Shares Volatile

August 9, 2012 3:33 PM EDT
Shares of Knight Capital Group, Inc. (NYSE: KCG) are seeing major volatility into the close Thursday on market data that is giving investors conflicting signals on the state of the company.

On one hand, CEO Thomas Joyce told the Wall Street Journal that market-making activity is running 85-95% of normal and institutional trading is running 65-75% of normal.

On the other hand, in its 10-Q filing the company updated its 'Risk Factors,' disclosing that it may have additional losses and liabilities as a result of the August 1st trading error.

From the Filing:

We may experience additional losses and liabilities as a result of the technology issue that arose on August 1, 2012, and the event of August 1, 2012 may cause customers and counterparties to lose confidence in our systems and adversely affect our reputation, results of operations and ability to attract and maintain our business, and may also result in lawsuits, regulatory investigations and other burdensome costs for the Company

The Company experienced a technology issue at the open of trading at the NYSE on August 1, 2012. This issue was related to our installation that day of trading software and resulted in us sending numerous erroneous orders in NYSE-listed and NYSE Arca securities into the market. Although this software was subsequently removed from the Company’s systems and clients were not negatively affected by the erroneous orders, and the software issue was limited to the routing of certain listed stocks to NYSE, it resulted in the Company realizing a pre-tax loss of approximately $440 million. This severely impacted the Company’s capital base and business operations, and the Company experienced reduced order flow, liquidity pressures and harm to customer and counterparty confidence.

On account of this technology issue and its impact, we may become subject to litigation by parties alleging that they have been damaged by this technology issue, including our shareholders. In addition, the SEC or another regulatory or governmental agency may decide to conduct an investigation into the technology issue. While we are unable to predict the outcome of any possible litigation or investigation, an unfavorable outcome in one or more of these matters could have a material adverse effect on our financial condition or ongoing operations. In addition, if we become subject to such litigation or investigation, we would expect to incur significant additional expenses in defending against any litigation or in connection with any investigations, and in implementing technical changes and remedial measures which may be necessary or advisable. In addition, we may be required to take additional remedial steps that could be burdensome for our business operations.

Any inability to demonstrate that we have fully resolved and remediated the technology issues stemming from the events of August 1, 2012 or concerns about future technology issues could cause existing customers to lose confidence in our systems and could adversely affect our reputation and our ability to attract or maintain customers and counterparties. In the ordinary course of business, we attempt to mitigate risk from technology and systems malfunctions through policies, procedures, and ongoing preventative and detective measures. Following the events of August 1, 2012, we have begun an internal review into such event and associated controls and intend to take appropriate remedial measures based on the findings of such review. However, in the event that we are not able to restore the confidence of our customers or counterparties as a result of the events of August 1, 2012, we may experience reduced business activity in our trading, market making and other businesses, which could adversely impact the results of our operations.

Shares of Knight Capital are down 3 percent to $3.07 into the close. Shares traded at $10.33 before the trading debacle.

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