Under the new deal, Knight and Getco will combine into a new publicly traded company. Knight shareholders other than Getco will have the right to pick either $3.75 per share in cash or one share of common stock in the new business.
"The transaction provides near-term certainty in the form of cash," Knight Chief Executive Thomas Joyce said in a statement.
Daniel Coleman, Getco's chief executive, will be CEO of the new company and Knight's Joyce will be executive chairman of the board of directors, according to the statement. The deal is expected to close in the second quarter of 2013.
The new board will have nine members, with five from Getco and four from Knight.
Knight was rescued this summer by a group of investors that included Chicago-based Getco and was led by Jefferies Group. The group injected $400 million into Knight after errant software sent millions of unintentional orders in the opening 45 minutes of the U.S. trading day on Aug. 1.
Knight investors with the Jefferies and Getco group have agreed to limit the cash they take to 50 percent of their Knight shares so that other stockholders can receive up to $720 million in cash, according to the statement. If requests for cash top $720 million, they will be pro-rated.
The stock to be paid will be issued by the company formed from Getco and Knight.
Getco had made an unsolicited bid for Knight in late November, which was followed by an unsolicited bid from Virtu. By Tuesday, Getco had increased the cash portion of its offer and valued its bid at $3.60 a share while Virtu had boosted its all-cash offer to $3.20 a share, sources said.
Apart from Getco, the summer rescue group led by Jefferies included Blackstone Group, TD Ameritrade Holding,Stifel Financial, and Stephens Inc.
Getco investor General Atlantic, as well as Blackstone and TD Ameritrade, were given seats on Knight's board as part of the rescue.