From Knight To Schrödinger Cat: Brokerage Scrambles Half-Alive, Half-Dead

Tyler Durden's picture

Update via CNBC:


Or not. We will know for sure in a few hours after TD and Getco know all they need to know about Knight's business and no longer need to give it false hope.

Knight Capital is scrambling: it has a few hours to convince any potential suitors that it is worth some $300 million more alive than having its carcass picked off at a cost of $0.01 over its debt (which itself will likely be materially impaired) in a Chapter 11 Stalking Horse sale. If the Sunday before the Lehman, and MF Global, bankruptcy filings is any indication, the third time will not be the charm for the company whose 1400 employees may have no place to call work at 9am tomorrow. Sadly, in a world in which entire countries and continents have taken on the patina of Schrödingerian felinism, constantly shifting between alive and dead states depending on who is looking, we would take the under on the probability that the firm's lawyers will not be visiting 1 Bowling Green at some point in the next 16 hours.

From the WSJ:

Knight Capital Group Inc. continued talks Sunday morning aimed at a deal that would allow the company to avert bankruptcy and open for business Monday morning, according to people familiar with the matter.


The discussions followed all-day meetings at Knight on Saturday as the hobbled brokerage sought to negotiate a transaction that would provide long-term funding, the people said. A software error at Knight last Wednesday caused millions of errant trades that the Jersey City, N.J.-based firm later said would cost it $440 million.


On Thursday, Knight arranged short-term funding that allowed it to operate on Friday. Knight needed the funding in place to be sure it could meet margin requirements, a necessary step in clearing trades at the heart of the firm's brokerage business.


Knight operates with two types of loans, short-term credit lines to fund daily trading and $300 million of syndicated loans for general corporate purposes, according to public filings. Several hedge funds have approached Knight about refinancing the syndicated loans if necessary, other people said.


It wasn't clear whether any such deal would happen, and the firm was also making bankruptcy preparations in case an agreement falls through.

The problem with Knight is that this is not a simple refinancing in a (Z/N)IRP environment: that could have been achieved in no time at all. In this case, it means providing additional capital to plug already incurred balance sheet losses, and shortfalls, that amount to more than the company's entire cash balance. That would mean not only cramming down everyone else on the balance sheet, but finding new unencumbered hard, money-good assets that can be pledged against new cash. Alas, very much like Europe, Knight just does not have these. Instead, anyone interested in the firm's existing assets will likely wait until fair value impairments wipe out its equity cap and impair its debt for a "fresh start", at which point any incremental debt will provide operation funding. Just like the Barclays take under of Lehman's North America brokerage even as the rest of the firm remained as a bad bank. In other words: a bankruptcy filing.

If this is the ritualistic sacrifice that has to be made in order to get someone within the regulatory staff to finally do something about the persistent threat that is HFT, so be it. All of this could have been avoided a long time ago ago if the SEC actually understood what it was doing and had any idea of how broken the market was, and if the SEC was not co-opted by the same HFT interests that have made amockery of stock trading.

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Silver_K-9's picture

The road from 1% to the 99% is swift...

jekyll island's picture

Too bad it wasn't Goldman Sachs. 

morning_glory's picture

On a long enough timeline the survival rate for everyone drops to zero.

MillionDollarBoner_'s picture

"people familiar with the matter"

Fuck off! Either put your name to it or expect us to treat it as what it is - propaganda...


Thomas's picture

I am guessing in another era, they might have been saved. But in the current climate, Wall Street fuckups are not being received with much sympathy.

NewThor's picture

This is the ONLY way possible for Goldman Sachs to get Knighted.

SAVED for letting a $10 million dollar a minute losing computer program run for 45 minutes?

I don't think you're reading all the cards right.

MFGlobal. PFG. Knight. That's a BIG chunk of futures trading consolidated in a short amount of time.

They're faking moves as they make moves.



lemonobrien's picture

this is what i think too. 

disabledvet's picture

Knight is an actual market maker...not some puny wannabe commodity scam. They have to match bids to asks...and once they're gone who's going to do that? Certainly not Goldman. They work under the "We bid you ask" method! Could see...probably WILL see a LOT of voltility in..."smaller"...names once Knight is appears to have been done.

gmrpeabody's picture

But..., I thought HFT helped to establish price discovery?

Jay Gould Esq.'s picture

"Find me a dead cat."

-- Sean Connery, "Edward Pierce."
"The Great Train Robbery" ( 1979 )

Buckaroo Banzai's picture

Futures trading consolidated, or futures trading destroyed?

I say "destroyed" because who in their right mind would keep trading futures given where the industry stands?

DeadFred's picture

The thought crossed my mind with a couple of questions. If they don't have enough money is that going to affect the settlement of their bad trades? If so the nasty third party risk issue rears its head again. How come I've seen zilch on how this came about? I would have expected some mention of who got fired for the bad program. Matbe a headless corpse of some recent MIT grad progremmer found in the Hudson? This story has more to it than what we're hearing.

Haager's picture

There are - as far as I can see - 2 reasons for a financial player to save the Dark Knight

a) Knight is able to stand on their own feet once it is saved

b) You will be next if Knight fails



Skateboarder's picture

Right on man. That "people familiar with the matter" stuff reeks of the typical Wall Skeet Jour-jour NewsCorp asshattery.

I've read the journal for quite a while now (proudly stopped my subscription a year ago after markets stopped behaving like markets should) and I don't think I've read a single article where real names were stated. Some people somewhere are always magically familiar with the matter! Well butter my ass and call it a biscuit - I'll be damned!

Al Gorerhythm's picture

If your ass was to be buttered biscuit, would that make it a Cracker?

Global Hunter's picture

but in the days leading up to the point where it "drops to zero" the last things remaining will be Goldman Sachs, weapons makers, Monstinko, big pharma etc.

I am Jobe's picture

Time to smash that Algo Box and bring down the fucking racks. After that hang the bastards

Skateboarder's picture

I don't think software was supposed to trade stuff. That's kind of... you know... a human activity. Like trading action figures or baseball cards or bushels of one crop for another, it's only elegant if there is some human emotion involved.

NewThor's picture

Alpha Omega Bodhisattva Vs. The high priests of the Fiat religion, their false king and their beast.


upWising's picture

Let us pray:

Technology will set us free, make our life simpler and richer, and raise evryone's standard of living.


Al Gorerhythm's picture

The same logic can be applied to guns. Guns don't kill people; although on one news channel the news anchor blurted that guns murdered x (I can't recall the stat they used) number of people last year. Not one gun was arrested for its crime. HFT is the algo's gun. HFTs murdered this company.

Extrapolating from all this, could HFT be construed an algo's second ammendment right and considering that the SEC hasn't made a move to repeal (it) the right to carry, concealed?

No CEO will be arrested as HFT "glitches" will be blamed.

Knight was a drive-by.

q99x2's picture

They were covering for the Bernank let down by driving markets higher. The FED owes them one. They'll be ok.

The Wizard of Oz's picture


Frastric's picture

Ahh crap! I invested 30000 virtual dollars in Investopedia stock market simulator on the stock. Buyed at the wrong time... Plus you can't short stocks below five dollars so I'm double-fucked, can't even hedge against my own folly...

upWising's picture

I think we all learned this Always-Always rule in 4th grade arithmetic:

"Any quantity multiplied by ZERO equals ZERO."

El's picture

If SOP is marking assets up, wouldn't the true value of Knights Capital be far less than what is on their books? Why would anyone bail them out given the environment we are in? Wouldn't that be throwing good money after bad? Just how much importance rests on name recognition, because I can't think of any other reason someone would come along in shining armor.

upWising's picture

Codpiece on the Shining Knight's Armour is rusted shut.


morning_glory's picture

Reckon Gamblers Anonymous will have had a few more attendees recently.

Jlmadyson's picture

All too surreal. Deja Vu like. Like I've been living this dream over and over again. 4 years later.


Groundhog day continues.

MillionDollarBoner_'s picture

Knight, PFG, MFG, Lehman, Bear Stearns - same pig, different colour lipstick!

Its all about liquidity to hide the insolvency. Here is the cascade:

1) Productive creation of capital = productive capitalism

2) Bank creation of credit = mortgage/re-mortgage fraud

3) Government creation of credit  = TARP, LTRO, Twist, ELA, etc.

4) Destruction of corporations and pillage of their reserves = corporate caniballism

Once 1) was tapped out, 2) followed, then 3) and 4) simultaneously with 3) fading, so 4) has to become more dominant.

Any ides for 5), 6), 7)?

This is the progression to the endgame - no turning back now!

Jlmadyson's picture

AIG, Freddie and Fannie pretty much should be in there as well.


I still do not understand how anything really big from Europe hasn't blown yet. Of course banks conitnue to be nationalized or bailed out otherwise.

MillionDollarBoner_'s picture



"Gender Equality" = both partners have to work to earn one living wage between them?

Permanent State of Warfare = "productive destruction"




lemonobrien's picture

exactly; the whole gay thing is about slavery; like women in the workplace; destroy the family, import new slaves; make the ones here deviant fuck ups; but, everyone works, everyone buys. the ponzi shall continue. social engineering bitches; now suck my dick slave.

jmcadg's picture

Northern Rock, Dexia, RBS, the Spanish bank recently.
I'm quite sure a massive bailout from somewhere, held RBS together for a bit longer just a dew weeks ago (computer glitch my arse), probably BoE.

MillionDollarBoner_'s picture

Totally agree.

The haemorrhage was from Ulster Bank, the Northern Ireland subsidiary of RBS which is balls-deep in the Irish commercial property lending train-wreck.

The "system glitch" was neccesary in order to avoid an overt "bank holiday" while the screws were put to the BoE - "save us or we go down together".

Like in Point Break where Keanu Reeves holds the gun to Swayzee's (God rest his soul) head while they are both plummeting to earth - unforgettable!

Antifaschistische's picture

Things don't blow because hard working people still get up every day and go to work and do today what they did yesterday.  That keeps the world going around.    It's when....for whatever reason (and there are dozens) that people are prevented or discouraged from going to that job that the world, or some part of it, stops.   This too will come.

ebworthen's picture

Not sure what number these would be but they are current or future ones:

- Devaluation of the currency, disguised by "relative value" to other currencies.

- Shadow inflation (bi-flation)

- Dilution of asset value (real estate, equities, pensions, treasuries, savings, etc.)

- Confiscation of assets via capture rules, withdrawal rules, punitive taxation, outright confiscation.

- Elimination of entitlements for retirees who have paid into them for 40-50 years and/or reneging on promised pension plans, retirement plans, etc.

The current and future target is the middle class; the confiscation of their assets, tangible and intangible, to feed the equities casino and the government sinkhole.

Amish Hacker's picture

I'll guess that 5, 6, and 7, however they eventually get labeled, will include the direct involvement of lots and lots of lawyers. First we had homeowners fighting in court over robo-signing, now giant insurance companies suing over LIBOR rigging. Throw in a few rounds of control fraud litigation (MF Global, et al) and a few municipal bankruptcies (looking at you, Stockton, San Berdoo), and I can almost hear the meter clicking, at $750 per billable hour.

MillionDollarBoner_'s picture

Yeah, how do those reptiles sleep at night and under which rock?

SokPOTUS's picture

Don't know about 5) and 6); but it hardly matters since 7) will likely include Actual Cannibalism.  We may even be at the bleeding edge of 7) now.  Bath Salts my ass.

CharliePrince's picture

i thought all hands were on deck

upWising's picture

all hands on DICK.  You just needed a little vowel movement.

Global Hunter's picture

This is the 3rd medium sized brokerage to go bust in less than a year.  Their plan is to keep vaporizing small and medium sized brokerages and consolidate control at the top (probably been said before but its blood apparent now).  Desperate times call for desperate measures.

edit: Million Dollar Boner has posted what I've posted (albeit with more detail) a few posts above mine, didn't read the posts before posting today d'oh.

Global Hunter's picture

lol, you are thinking what I have been thinking.  All of my great thoughts have been put together from the ideas of others. :)

MillionDollarBoner_'s picture

Yeah, I never had an original idea in my life :O)