Good for a Trade?

Written by GSCR Staff   
Thursday, 02 August 2012 08:44

The news regarding the automated trading insanity yesterday whose source was linked directly to Knight Capital Group (NYSE – KCG - $3.62) is dominating headlines and stories this morning.  It is not just that it puts a bulls-eye on the continuing issues with algorithmic-based trading.  But with an estimated $440 million loss related to the trading miscues there is serious concern whether the Company can bolster its capital base and meet net capital requirements.

I have mixed feelings on this story.  I remember when Knight was formed in the mid-1990’s. In fact, I had a great relationship with the major traders of the Firm early on, who traced their roots to Troster Singer, a major market maker in OTC securities.   In fact, I directed as much order flow as I could to those guys because they did what they could for us and our institutional clients that many other brokerage firms that did not have major trading operations.

Maybe it is nostalgia that makes it seem that all of this is such a shame.  Regardless, now we have viability issues with one of the largest and most important trading operations on Wall Street.  If they were to go under I wonder how it would impact market-making in stocks of all sizes.  So, the question becomes, can they secure financing to stick around?  My guess is that we will know in a matter of days.

If I had to bet I would say that they will get the financing necessary. Without this huge loss, the Company’s balance sheet was in fine shape and KCG was making some pretty good cash. So, with the stock at $3.62, one of two things will happen. Either they get financing and the stock goes back to the $5.00+ level, or it tanks and another venerable name bites the dust.

Be opportunistic here. Watch and wait. If they get the financing required, pounce on it, because it will likely be good for a trade.  Do not jump in yet as the risk/reward may not be in your favor.

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