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Mr. Lacen is a financial services entrepreneur who has spent the last seven years cultivating Mosaic Theories by leveraging a background in financial markets. From 2008 to 2009, he worked setting up his personalized real-time investment letter/fund his freshman year at Fordham. Randy has... More
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  • Knight Capital Group Passing The Reins On Wall Street 0 comments
    Aug 9, 2012 1:42 PM

    Knight Capital Group has now made public it has secured a $400 million dollar rescue fund to escape a possible bankruptcy for the firm. The rescue fund is due in part to an algorithmic trading error last week which caused Knight Capital Group billions of dollars in unwanted securities. Knight Capital is now under intense scrutiny from the entire finance community, to disclose all relevant information that may deem appropriate in accordance with the recent obstruction surrounding the financial giant. The insolvency issue at Knight Capital Group, is also raising more questions about the financial integrity that surrounds daily operations at the firm. The total sum of $400 million dollars could not begin to remotely close the erroneous loss of $5 billions dollars in unwanted securities at KCG. This desperate public display to "secure" a miniature rescue fund of limited proportions to Knight Capital Group should imply that Knight Capital Group is raising $400 million dollars for an underlying issue other than its recent trading losses.

    Since 2007, Knight Capital Group has recorded a 49% rise in gross profit while total expenses have more than tripled at the broker-dealer firm over the same period. According to the latest 10-K figures out on Knight Capital Group, net income has dropped 25% from 2007 to 2010 at the firm. The company has yet to recover net income from its peak in 2008, for 2012, as there was a modest 20% upside gain on net income from 2010 into 2011 for KCG. Knight Capital Group has clearly struggled longer-term to sustain its overall business model, not to mention protect substantial market share as a reliable broker-dealer down on Wall Street. The trading error August 1st was just the tip of the iceberg. Knight Capital Group has been actively seeking out refuge for its shrinking business, since the credit crisis bottomed in 2009.

    Knight Capital Group sought out to focus on negotiating an outside investment that would restore its firm's capital and preserve its independence, August 5th. Knight Capital Group rejected a previous bid for a $500 million dollar rescue-loan offer from Citadel LLC the same day, as Knight continued to work on a competing plan from its group of wealthy investors. Knight Capital's trading error represents about 40% of Knight's book capital and would deplete the firm's cash, according to a Bloomberg report quoting CLSA Credit Agricole Securities. Knight Capital Group is said to have only $365 million in cash on its balance sheet as of the end of June, with only $70 million on its revolving line of credit. A group of investors led by Jeffries Investment Banking Unit structured an equity deal between Blackstone Group, Getco Securities, Stephens Inc, Stifel Nicholas and TD Ameritrade to buy slices of convertible securities instead from the struggling capital group in exchange for investment. The securities in question are now said to convert into common stock at $1.50 a share, as the equity deal is sparking major controversy at Knight Capital. This deal takes ownership control of Knight Capital Group directly out of the Board of Directors and current shareholders in the company and sets control into the laps of Knight Capital's outside competitors who are currently building business models around market share in Knight's business.

    Knight Capital Group managed to strike the $400 million dollar financing deal with outside investors, to avoid a 363 asset sale through bankruptcy court proceedings following its dire financial situation on record. The outstanding Series A-1 shares and the Series A-2 shares will now madatorily convert into common stock on the third trading day following the date on which the closing price of the common stock exceeds 200%. Knight's disclosure in the 8-K SEC filing for the financing arrangement explains the conversion price is equal to 1,000 divided by the conversion rate in effect at such time, for an initial conversion price of $1.50 per share of common stock. In laments terms, KCG shares now have to trade and perform above $3.00/share over all major securities markets for 60 consecutive days in order to trigger the mandatory conversion for its newly-minted investors. At the moment, following the full convertibility date mentioned in Knight Capital Group's 8-K, any share of Series A-2 non-voting cumulative perpetual equity may be converted by the holder of such shares into shares of Series A-1 voting convertible preferred stock on the date of conversion. Retail investors on Wall Street remain on edge about the unexpected transfer of ownership that is to occur at Knight Capital Group, as the company is set to recover from the erroneous trading loss last week at the expense of the company's full year net income.

    The aftermath for KCG has lowered the full year growth forecast for Knight Capital Group in 2012, as investing professionals are very concerned for the retail investor on Wall Street. Money managers continue to grasp and move forth on potential solutions to restore confidence in the system. "Retail investors don't really trust equities. That's why money has been pouring into bond funds at virtually no return," said Bruce McCain, chief investment strategist at KeyCorp.'s Key Private Bank to Fox Business. Knight Capital's problems only seem to add to the lack of confidence already stirring up unfavorable emotions in U.S. markets. Interest rates will continue to stay low for an exceptional amount of time here in the U.S., as well as manufacturing and consumer data hitting a soft patch mid-year in the U.S. The trading issue at Knight Capital Group does not provide comfort to retail investors at the moment, when there is still so much uncertainty surrounding the strength of global business and even further uncertainty about gauging rampant debt-to-GDP across the European Union. Retail investors "ought to have a three to five-year horizon," said Kaplan to Fox Business. "A one-day trauma like this or even the Flash Crash is not going to be relevant to you if you have that kind of perspective." Professional and retail investors should begin asking themselves, "Is Knight Capital Group part of a longer trending chain of broken business decisions and ready to pass the reins on Wall Street?" The company is really banged up and no one knows how the stock will perform from here on out. What will the next meeting on KCG bring forth to the finance community, that cannot already be foretold?

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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