One Minute to Mid-Knight

By CNBC reporter Kayla Tausche

The market making firm has hired Sandler O’Neill to find a buyer or an injection of capital, people familiar with the matter said, after Knight disclosed a $440m loss associated with an algorithmic trading glitch. The aim: Strike a deal over the weekend, or - better yet before the weekend.

Bulge-bracket banks would likely swarm Knight in a sale, these people said, in order to assess the firm’s electronic trading platform, viewed as a marquis asset now discounted. The likelihood of a real bid emerging from a bank - like JPMorgan Chase, Goldman Sachs and Bank of America – is unclear, sources said, since the industry is caught in regulatory crosshairs and might be averse to taking unknown risks.

Among parties assessing whether to make full or partial bids for Knight are Chicago-based Citadel Investment Group and a handful of large-cap private-equity firms, people familiar with the matter said. Citadel was canvassing the market for an advisor on Thursday, according to these people.

Were Knight to find an injection of capital to stay afloat, it would be no small injection. Having lost 80% of its market capitalization in the wake of the trading loss, the firm’s $440m liability swelled to twice its stock value. In selling a stake, Knight would have to forfeit majority control.

In the meantime, Knight is carrying out a fraction of its regular business, as many of its largest brokerage partners have fled following the firm’s trading issues. Large retail brokerages like Scottrade, Vanguard, Fidelity Investments, TD Ameritrade, and E*Trade Financial were routing order flow around Knight on Thursday. In addition, Knight has requested that some big banks like Citigroup and JPMorgan voluntarily scale back their business, according to people familiar with the matter.

Knight did not respond to a request for comment.

As business continues, regulators have camped out at Knight’s Jersey City, N.J., headquarters to ensure that the firm’s capital levels remain intact.

Follow Kayla on Twitter @kaylatausche

Reproduced by kind permission of CNBC

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