As I stated in my article yesterday, there was a risk of bankruptcy for Knight Capital Group (NYSE:KCG) because of its trading glitch. Today that risk is stronger than ever. Every ramification that I mentioned in that article is now amplified.
Knight Capital Group's trading losses from the computer glitch were more than anyone had imagined. An analyst at JP Morgan predicted the losses would be about $170 million. Charles Gasparino, who correctly predicted the MF Global collapse, said losses could be over $300 million. Both analysts were incorrect. The losses were a whopping $440 million! That is a significant amount of the company's capital, and puts it at a real risk of bankruptcy.
Today, the company reported that it has now closed all of its positions from yesterday. So the losses are likely more than $440 million.
Today on Bloomberg, KCG's CEO Tom Joyce was interviewed and he acted like his Company's troubles are over. Things he said were:
1. "We're back in the office today and are fairly busy"
2. "We've invited our clients back"
3. "The computer glitch was just an anomaly"
What I have to respond to that is:
1. You're busy putting out fires I'd imagine.
2. How many have taken up your offer? Today, clients aren't coming back until the company has shored up its finances. While the company is doing this, its competitors are getting its clients' business. I think most clients won't ever come back, they will probably mostly withdraw their funds and put it in a competitor to Knight like Citadel.
3. An anomaly huh? So another anomaly and you go broke? I know that when there's one cockroach, there's a nest. And the queen cockroach has just showed her head. How many spin-offs of that anomaly will happen that will make bad trades? How many times will your computers make little mistakes that don't actually make the headlines.
Why didn't the trading computer have an off switch? It went on for over 30 minutes. Confidence is now almost completely lost in the firm. How can clients be confident and sleep well at night with Knight Capital holding their money. Once a huge loss of confidence happens, a domino effect occurs. Like what happened with MF Global, first it loses some customers, then more leave, and they follow each other like lemmings. Currently, there are many former customers at MF Global that are still trying to get their money out. KCG clients don't want to be in that same situation. Not to mention, many KCG employees will now leave the company to go to competitors that are no doubt headhunting them as I write this.
Knight is now looking for a "white knight" to buy it out. If it finds one, that would be an anomaly.
Disclosure: I am short KCG.