Knight Capital Group’squest for a buyer will be a sprint, not a marathon.
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 $440 million 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, or Bank of America (all of which declined to comment) – is unclear, sources said, since the industry is caught in regulatory crosshairs and might be averse to taking unknown risks. (According to regulatory filings, JPMorgan was among firms bidding on defunct brokerage MF Global in the days leading up to its bankruptcy filing.)
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 percent of its market capitalization in the wake of the trading loss, the firm’s $440 million 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 continued to route order flow around Knight.
On Friday, E*Trade told CNBC it is still routing trades away from Knight, adding it is evaluating the situation on a day-to-day basis. Vanguard said it too is still routing trades away from Knight. TD Ameritrade's spokesperson told CNBC, "We're focused on our clients and making sure their orders are routed appropriately. We continue to take a day-by-day approach in evaluating when it would be appropriate to begin routing through Knight again. They've been a good and trusted partner so far, and as long as they remain in good standing, we will continue working with them." As for Scottrade they told CNBC, "At this time, we continue not to route through Knight.”
Reuters is reporting Fidelity is still not routing through Knight. When contacted by CNBC, the company would not confirm that , saying only “Fidelity doesn't comment on business relationships with other firms."
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.
—By CNBC’s Kayle Tausche, with additional reporting from Jesse Bergman and Margaret Popper
Follow Kayla on Twitter @kaylatausche