Why Knight Capital's Shares Got Decimated
Aug 3rd 2012 12:30AM
Updated Aug 3rd 2012 12:40AM
Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
So what: Yesterday was big. Really big. In the matter of just 45 minutes, an out-of-control trading algorithm had led to a gargantuan $440 million trading loss for Knight Capital.
This needs to be put in perspective. After all, it might seem on the small side for those thinking about JPMorgan Chase's (NYS: JPM) multibillion-dollar loss at the hands of the London Whale. For Knight, $440 million represents more than 30% of its revenue for the past year. It's more than four times its trailing-12-month profit and $116 million more than its total profit between 2009 and 2011. It's also close to 30% of the company's shareholders' equity, so it's no wonder that Knight said in a press release that the event "severely impacted" the company's capital position.
Now what: This dismounted Knight needs a white knight, pronto. On Thursday, the company was frantically looking for a source of financial backing, if not a buyer for the entire company. Fox Business Network also reported that management is considering a bankruptcy filing.
For the markets, there were definitely some jitters introduced by the Knight glitch. For Knight though, 45 minutes may have been just enough to behead the company.
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