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Can Knight Raise the Capital to Survive?

Can Knight Capital raise capital to survive as a standalone company?

NYSE trader
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NYSE trader

These are critical moments for the company.

The $440 million trading lossthey announced this morning likely wiped out all the cash on the balance sheet, and they need cash to keep the company running.

Can they raise cash, and how much do they need?

Egan Jones has said that KCG probably needs $600 million of equity capital, but its market cap is now only $255 million. How are they going to raise $600 million (assuming this is an accurate estimate) with a market cap of $255 million?

But they have to raise something. They need cash.

The possibilities are:

1) A secondary offering. Possible, but very difficult...at the current price, and market cap of $255 million, how could they do a 100 percent secondary, likely the minimum they would need?

2) A direct investment. Again, possible but there is significant reputational risk. There are likely parties unwilling to trade with them now. Vanguard has announced that "based on recent events, we are routing brokerage orders exclusively to other vendors at this time."

Oh man, that is bad news. Vanguard is the fourth biggest investor in the company. They are routing orders away? Very bad.

3) A sale. Yes. This company is valuable. They are one of the largest market makers in the industry. They compete against Cittadel, UBS , GETCO, Virtu, and Citi . Any of them could be buyers of all or part of the company (WSJ has reported talks with Virtu, Virtu had "no comment" when I contact them).

Other potential buyers? Just think who runs market making operations. Goldman Sachs . Jeffries . Interactive Brokers . Cantor. Or even private equity!

They also have valuable electronic trading platforms, and an agency business.

The problem: a sale would take time. Egan Jones has noted a sale of the firm might take 90 days under good conditions; they need a lot of cash before that, like right now.

One last, last thing...you think this is painful to watch? Try being Fidelity. They are the largest institutional owner of Knight...16 percent! Together, five firms own 40 percent of the company.

% of Shares Outstanding

  • Fidelity Investments 16.6%
  • Royce & Associates 12.5%
  • BlackRock 6.1%
  • The Vanguard Group 5.2%
  • Dimensional Fund Advisors 4.3%

At 3:40 PM ET, volume in Knight was trading north of 145 million shares...the float (total shares outstanding) was 98 million. They've traded more than the entire float in a single day. Think any of the guys above are getting out?

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  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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