(Bloomberg News) Knight Capital Group Inc. Chief Executive Officer Thomas Joyce said in a letter to clients yesterday the firm is "in good standing" with clearinghouses and its broker-dealer units have sufficient capital.
Joyce also said the post-tax loss stemming from Knight's trading error was about $270 million, compared with a previously reported pretax loss of $440 million. The letter comes a week after Knight, one of the biggest market-making firms in the U.S., was driven to the brink of bankruptcy after a technology malfunction spewed orders into the market by mistake.
Knight's relationships with the Depository Trust & Clearing Corp. and the Options Clearing Corp. remain intact, according to the letter from Joyce. Knight Capital Americas LLC and Knight Capital Europe Ltd., the firm's broker-dealer units, have held capital above the minimum requirements and consistent with historic levels, he wrote.
"Our review of the August 1st technology issue is ongoing and we take this matter very seriously," Joyce wrote in a letter obtained by Bloomberg News and confirmed by Knight spokeswoman Kara Fitzsimmons. "We are in discussions with external advisors in an effort to effectively assess the situation, in addition to our internal review."
Knight was saved from collapse on Aug. 6, when it received a $400 million cash infusion through the sale of convertible securities from a consortium of investors. Getco LLC, Blackstone Group LP, brokerages Stifel Nicolaus & Co. and TD Ameritrade Holding Corp., as well as Stephens Inc. and Jefferies Group Inc. invested in the rescue funding, according to the Jersey City, New Jersey-based company. The investment will give the firms a 73 percent stake in Knight once the shares are converted into common stock.
Clearinghouses such as DTCC and OCC operate as central counterparties for all buy and sell orders executed or handled by their members, who post collateral, reducing the threat from a trader's default. Their members are called clearing firms.
"DTCC has been in near-constant communication with Knight since last Wednesday and throughout much of the weekend to address the myriad of issues arising from this situation," Michael C. Bodson, president and chief executive officer of the clearinghouse, wrote in an Aug. 6 letter to clients, a copy of which was attached to Joyce's communication. "DTCC has been in close touch with our regulators and our board during this time to keep them fully apprised of our discussions with Knight and the actions we have undertaken to provide stability to the markets during this period of uncertainty."
Knight's stock rose 3.9 percent to $3.18 as of 12:50 p.m. in New York today and is down 69 percent from its closing price before the Aug. 1 software malfunction.
Knight rejected a $500 million rescue-loan offer from Citadel LLC on Aug. 5, said two people with knowledge of the matter. The loan terms would have given Citadel a minority stake in Knight's stock and an interest in its HotSpot foreign-exchange subsidiary, said the people, who spoke on condition of anonymity because the talks were private. Citadel, the $12.5 billion hedge fund run by billionaire Ken Griffin, competes with Knight's market-making and electronic-trading business.
NYSE Euronext said in a statement yesterday that Knight will resume its duties as a designated market maker on the New York Stock Exchange on Aug. 13. The exchange said that all of the firm's securities, staff, operations and systems will return to Knight after being temporarily reassigned to Getco earlier this week.
Designated market makers are traders on the floor of the NYSE who buy and sell specific stocks to help increase liquidity in the market, performing many of the tasks of what used to be known as specialists.