7:36 p.m. | Updated The Knight Capital Group was near a deal on Sunday to secure a financial lifeline from an investor group that included TD Ameritrade and the Blackstone Group, capping its efforts to stay alive, people with direct knowledge of the matter told DealBook.
The proposed lifeline came together days after the trading firm disclosed a $440 million trading loss tied to a glitch in its software that gyrated shares in 148 companies.
Under the terms of the plan, the new investors — who also include General Atlantic, the private equity shop that owns the trading firm Getco, and Stifel Nicolaus — would receive convertible preferred securities that give them the right to buy new shares in Knight, at a price of roughly $1.50 each, these people said.
The rescue package, which was arranged by the Jefferies Group, will significantly dilute the holdings of existing shareholders, with the new investors owning roughly 70 percent of the firm, one of these people said. But it will leave Knight alive and independent.
Talks over a final deal were still ongoing as of Sunday evening, and could still fall apart, these people cautioned. The goal was to announce a plan before markets opened on Monday, to assure trading partners of the firm’s survival.
Representatives for Knight and the investor consortium declined to comment.
The market maker and its advisers have been in talks with a number of potential suitors and investors since late last week, hoping to secure enough capital to stay afloat and avert a need to file for bankruptcy. Among the options that it had been seeking were selling off pieces of its businesses and taking on new investors.
Some of those potential suitors had walked away, however. The Citadel Investment Group ended its look at Knight on Saturday, according to a second person briefed on the sales process, citing potential regulatory concerns. And other possible investors, including Kohlberg Kravis Roberts, had decided early on not to pursue any deals with the company.
The potential investment from the TD Ameritrade consortium could prove costly to existing investors, however, as it is likely to come in the form of financial instruments that would dilute existing shareholders, the person briefed on the discussions with the consortium said.
The last four days have proved a roller-coaster experience for Knight’s employees. Shares in the trading company plunged 75 percent on Wednesday and Thursday, following the disclosure of the trading error and the accounting charge. Some of the firm’s biggest trading customers, including the Vanguard Group, TD Ameritrade and E*Trade Financial, stopped routing client orders to Knight on Thursday as they assessed the firm’s outlook.
But Knight told trading partners on Friday that it had secured a short-term financial lifeline that allowed it to operate that day, news that helped convince customers like TD Ameritrade and Scottrade to resume doing business with the firm. The news prompted a 57 percent bounce in its shares.
Traders in the firm’s Jersey City headquarters clustered around television screens that day, clinging to any scrap of good news, according to Knight employees who declined to be named because they were not authorized to speak publicly.
Jessica Silver-Greenberg contributed reporting.
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