What's Next for Knight Capital?

A trader works at a Knight Capital Group Inc. post on the floor of the New York Stock Exchange.
Jin Lee | Bloomberg | Getty Images
A trader works at a Knight Capital Group Inc. post on the floor of the New York Stock Exchange.

What's next for Knight Capital? A couple of questions still floating around:

1) will Tom Joyce remain as chairman? I can't imagine he won't stay as CEO; he is highly respected on the Street, even with this embarrassment. (Knight Is Still Trying to Find Out What Went Wrong: CEO)

However, there will be three new members to the board of directors representing the new investors. Tom Joyce is not only CEO, he is also chairman of the board; here will certainly be a discussion about whether they want a non-executive chairman.

2) will the company keep all of its parts?

Just because the company survived, doesn't mean they will keep all parts of the company. While the market-making operation is the biggest money-maker (about half of revenues), the company also has a substantial institutional sales and trading operation, and electronic execution services in equities and commodities markets, including options and futures. They also own nearly 20 percent of the Direct Edge exchange.

3) what remedies will Knight propose? First they have to identify what happened. Joyce, in my interview with him this morning, said they were conducting an internal investigation into what caused the "coding error," but an equally important question is why it took so long to shut down the program. The company was notified within a few minutes of the 9:30am ET opening that something was wrong, but at least parts of the program ran for a half-hour.

As I discussed on Friday, there will be a lot of analysis around "Systems Risk" and what internal policies firms like Knight can develop that will control programs of this sort.

It's not that difficult: you can develop limits around a firm's positions (limiting how much by dollar value they are committing at any one time), or just by volume (if you normally send out, say, 1 million shares to buy or sell the market in a second, and suddenly you are sending out 25 million shares a second, the system either goes into slow mode or shuts down).

4) What will the impact on earnings be? It's too early to say, but this snafu likely will hurt them. It seems reasonable that there might be some degradation in market share of the wholesale order flow that is so critical to Knight, but how much is uncertain: 5 percent? 10 percent? More?

We don't know if the retail firms that directed orders to Knight will continue to do so at the same levels they did earlier, nor do we know if competitors will try to expand their share of the pie, or even if others who are not currently competing for wholesale order flow may not jump in.

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