Will Knight Capital Be SAVED?

Fidelity Investments was not routing customer orders through Knight Capital Group (NYSE:KCG) on Thursday after the latter said it lost $440 million in capital because of a software glitch. Fidelity, which had 18.3 million brokerage accounts and averaged 400,000 daily commissionable trades during the first quarter of the year, was joined in dropping Knight by TD Ameritrade.

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Knight stock sank more than 60 percent in midday trading on Thursday and the company said it was working hard and quickly to secure outside financing and other ways to “strengthen its capital base.” Knight is in talks with rival trading firm Virtu Financial about a potential merger or capital infusion, the Wall Street Journal said. It has also asked for funding from JPMorgan Chase (NYSE:JPM), according to the report.

On Wednesday, Knight, one of the biggest brokerage firms in the U.S. stock market, asked clients to route orders elsewhere because of a “technology issue” that led to several stocks showing unusual price and volume moves. The problem resulted in Knight’s systems sending errant orders to the New York Stock Exchange. The exchange operator later canceled trades in six stocks that had seen price swings of more than 30 percent on Wednesday morning. Knight was required to honor the remaining trades, and it said Thursday it had exited from all the positions, which could increase its losses.

Securities regulators are also looking into the errors. “Our understanding is that the SEC and Finra are reviewing what happened yesterday,” CBOE Holdings (NASDAQ:CBOE) chairman William Brodsky told analysts. “We’re obviously reluctant to get ahead of the regulators on this…I really think we ought to let the facts come out and then see what happens.”

Knight chief executive Thomas Joyce told Bloomberg television that the technical problem was the result of new software installed on Tuesday evening to prepare for a new trading program being introduced by the NYSE. Joyce said Knight’s software design was at fault.  On Thursday, Knight said the problem had been resolved and that usual business could resume.

However, companies are still obviously still reluctant to do business with Knight. CME Group (NASDAQ:CME), which regulates Knight’s futures brokerage, said it was monitoring the issue.

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