Knight Records Negative Revenue Due to Trading Snafu
October 17, 2012
The final tally: $457.6 million.
That at least is the charge that Knight Capital took against its third quarter earnings, announced Wednesday morning, for the trading losses it incurred on August 1.
That was the day a “large software bug” in freshly installed software triggered what chief executive Tom Joyce termed “dormant software” to send out a flood of erroneous orders onto the nation’s stock exchanges, in the first 45 minutes of trading.
The firm originally projected its losses at $440 million. The huge loss, which swamps its typical quarterly revenue, led the company to sell 70% of its shareholders’ equity to a group of investors led by Jefferies & Co., to save the firm and bolster its long-term capital.
The huge loss caused Knight to report “net negative revenues” for the financial quarter ending September 30 of minus $189.8 million. That compares to “positive” revenues of $397.4 million in the same quarter last year.
All told, stockholders took a loss of $764.3 million or $6.30 a share. Of that, $3.08 a share was attributed to a dividend paid to investors that was a feature of preferred shares issued in its recapitalization on August 6. The direct loss from the “technology issue” represented a $2.46 share hit.
"The recapitalization restored the firm's liquidity and capital, Knight's market share in U.S. equities substantially rebounded, and we've undertaken measures to enhance processes and controls," Joyce said.
The company now has $420 million in cash and cash equivalents, as well as “regulatory excess capital” of $250 million, he said, on an earnings call Wednesday morning. The company also expects a $174 million tax refund in the first half of 2013.
Knight, he said, “is better capitalized now than we were before August 1.”
Knight’s Market Making operation took the brunt of the losses.
That business took the $457.6 million hit and reported “total net negative revenues” of $341.2 million. Its pre-tax loss was recorded as $452.0 million.
A year ago, that business reported revenue of $204.9 million and pre-tax income of $69.2 million.
"The Market Making segment bore the near full financial impact of the trading loss incurred as a result of the technology issue," Joyce said, in announcing the official size of the losses. But, he said, also contributing were a “decline in retail trading activity,’’ lower market volatility and a writedown of intangibles in Knight’s designated market maker unit.