This page has been archived and commenting is disabled.

The Math Behind Egan-Jones' Downgrade Of Knight To Triple Hooks

Tyler Durden's picture


Moments ago, Egan Jones downgraded Knight Capital again, having downgraded the firm yesterday, from B- to CCC. The reason: the math just does not work out (pretty much as is the case with Europe, and the entire Welfare state developed world paradigm, but that's a different story). Full logic below.

Tough math - KCG probably needs $600M of equity capital but its market cap is only $300M and therefore probably can only raise $80M to $90M using normal rules of thumb. A sale of the firm would take 90 days under good conditions and therefore only an equity or quasi-equity investment makes sense. However, with weakness in the markets, there is likely to be few likely buyers. In a good year KCG earns $115M and therefore the $440M loss is debilitating. (Watch for the secondary losses related the loss of client confidence.) Net revs for the June quarter declined by 13% YoY. The Market-Making segment revenues were down 21% with pre-tax income down 84% from $39.2M to $5.9M due to trading losses related to the Facebook IPO. June quarter oper inc was down from $29.5M to $5.4M. We are downgrading

Source: EJ


- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Thu, 08/02/2012 - 13:57 | 2673127 Seasmoke
Seasmoke's picture

someone will buy it for pennies and not have to pay any taxes for 4 years

Thu, 08/02/2012 - 14:10 | 2673200 Divided States ...
Divided States of America's picture

Nice, the big banks just took out another competitor. The list of smaller financial corpses are piling up.



Thu, 08/02/2012 - 15:47 | 2673647 AldousHuxley
AldousHuxley's picture

New Jersey has a lot of shit piled up.

Goldman Sachs moved to Jersey at hudson street right when they were full of shit.


Manhattan can only pile so much shit.

Thu, 08/02/2012 - 16:44 | 2673951 Papasmurf
Papasmurf's picture

The big banks wrote the algo. 

Thu, 08/02/2012 - 21:43 | 2674614 iinthesky
iinthesky's picture

Gives a new meaning to Facefuck

Thu, 08/02/2012 - 14:14 | 2673223 jmcadg
jmcadg's picture

That'll be Mitt Romney then.

Thu, 08/02/2012 - 14:15 | 2673225 Silver Bug
Silver Bug's picture

There will be many many more downgrades to come.

Thu, 08/02/2012 - 14:32 | 2673305 LMAOLORI
LMAOLORI's picture



'Knight-mare': Trading Glitches May Just Get Worse

Thu, 08/02/2012 - 15:03 | 2673419 nonclaim
nonclaim's picture

"someone will buy it for pennies"


The clients are gone or going, the best employees are the first to jump to a better offer and the name/brand is now of incompetence.

What is left, negative equity and unknown liabilities, sounds like a great deal...

Thu, 08/02/2012 - 22:02 | 2674656 Buck Johnson
Buck Johnson's picture

It's done, truly done.  By tomorrow afternoon it could be delisted.

Thu, 08/02/2012 - 13:58 | 2673132 bigwavedave
bigwavedave's picture


Thu, 08/02/2012 - 13:58 | 2673133 DrDinkus
DrDinkus's picture

Been a satisfying day to see the demise of NITE and Draghi look like a buffoon...egan WHO?

Thu, 08/02/2012 - 14:06 | 2673140 Cognitive Dissonance
Cognitive Dissonance's picture

"The reason: the math just does not work out......."

Excuse me Tyler, but clearly you have not updated your "New New Math" financial textbook to the latest "hopium" edition, edited by Krugman.

For only four credit card charges of $199.99 each I'll be happy to ship my good-as-new used copy to you pronto. Have your people get in touch with my people.

But hurry. The Limerick King was eyeing my copy when he came over last night and got drunk.....again. (Just kidding Limerick King. You can get drunk any where you want.)  


Thu, 08/02/2012 - 14:39 | 2673336 DOT
DOT's picture

"The reason: the math just does not work out......."

That's New,New, Flabby Math CD.    ;

Thu, 08/02/2012 - 15:04 | 2673425 azzhatter
azzhatter's picture

what is this "math" you speak of. It's irrelevant

Thu, 08/02/2012 - 14:41 | 2673339 AlaricBalth
AlaricBalth's picture

Hey CD. Why am I seeing charges from Spearmint Rhino suddenly showing up on my credit card bill. You said four charges @ $199.99 each. $7,845.50 is alot of money for my textbook, which has not been received, I might add.

Thu, 08/02/2012 - 14:48 | 2673371 Cognitive Dissonance
Cognitive Dissonance's picture

This droid CD is not the CD you're looking for. :)

Thu, 08/02/2012 - 14:01 | 2673144 bdc63
bdc63's picture

roadkill.  get ready to watch the vultures as they start feasting on the carcass ...

Thu, 08/02/2012 - 14:13 | 2673218 Papasmurf
Papasmurf's picture

I think the feast is over.  Vultures picked them over during coffee hour yesterday morning.

Thu, 08/02/2012 - 14:00 | 2673147 Conman
Conman's picture

Solution let them merge with another robot shop and let them get TBTF. Solved!

Thu, 08/02/2012 - 14:00 | 2673149 buzzsaw99
buzzsaw99's picture

they got facebooked too? lololololol

Thu, 08/02/2012 - 14:08 | 2673191 Cangaroo.TNT
Cangaroo.TNT's picture

Speaking of which, love the flat-line action at $19.99-$20.00.  You know it just wants to break to the downside in a bad way, but they [MS] are putting up a good fight to prevent that.

Thu, 08/02/2012 - 14:14 | 2673221 buzzsaw99
buzzsaw99's picture

it feels like 1999 all over again. lulz

Thu, 08/02/2012 - 14:11 | 2673206 walküre
walküre's picture

The Zuck slayed The Knight

Thu, 08/02/2012 - 14:12 | 2673211 Cangaroo.TNT
Cangaroo.TNT's picture

Party like it's 19.99

Thu, 08/02/2012 - 14:17 | 2673238 walküre
walküre's picture

W.Banzai could do a number on this

Thu, 08/02/2012 - 14:00 | 2673150 fonzannoon
fonzannoon's picture

What consequences are there to the broad marketplace if this company goes under? Are there any?

Thu, 08/02/2012 - 14:11 | 2673207 walküre
walküre's picture

The end of the OTC as you know it.

Thu, 08/02/2012 - 14:00 | 2673151 Dr. Engali
Dr. Engali's picture

There won't be anything left to downgrade come Monday. If they make through Friday I will be surprised

Thu, 08/02/2012 - 14:00 | 2673153 LetThemEatRand
LetThemEatRand's picture

Knight.  "The science of trading.  The standard of trust."

How I love Orwellian corporate bullshit speak when it is exposed in its full glory.

Thu, 08/02/2012 - 14:10 | 2673205 Miss Expectations
Miss Expectations's picture

The Second Mile is a nonprofit organization serving the youth of Pennsylvania. At The Second Mile, we are committed to helping young people achieve their potential as individuals and as community members and providing education and support for their parents and youth service professionals.

Thu, 08/02/2012 - 14:29 | 2673293 alarm bell
alarm bell's picture

Serving is what they call it now.  huh

Thu, 08/02/2012 - 14:02 | 2673162 francois
francois's picture

We have a body, (Knight),  motive (profit from foreknowledge of what was going to happen), suspects (insiders at Knight, anyone with the hacking ability to do this).

There are no tracks, since the suspects are hiding amongst all the other people that were trading these events.

Could the same serial killers be at work taking the last profit out of our carcass of an economy?

WHere is Hercule Poroit when you need him?

Thu, 08/02/2012 - 16:15 | 2673776 rufusbird
rufusbird's picture

Walking in circles repeating to himself, "there are no coincidences".

Thu, 08/02/2012 - 14:05 | 2673172 The Gooch
The Gooch's picture

OT but had to...

London mayor get's stuck on Olympic zipline...

Thu, 08/02/2012 - 14:05 | 2673178 shovelhead
shovelhead's picture

From a $10 Cohiba to a stogie in the gutter in about the same amount of time.

Death got no mercy in this land.

Thu, 08/02/2012 - 14:07 | 2673185 Winston Churchill
Winston Churchill's picture



You are the man.

Thu, 08/02/2012 - 14:08 | 2673193 Jlmadyson
Jlmadyson's picture

Fed plus ECB math might work.

Thu, 08/02/2012 - 14:09 | 2673195 Nonexistent Uni...
Nonexistent Uninvented God's picture

CCC? More like  B===D(_._)



Thu, 08/02/2012 - 14:50 | 2673376 NotApplicable
NotApplicable's picture

Actually, I'd say it's more like  B===D(_O_)

Thu, 08/02/2012 - 14:10 | 2673199 ArrestBobRubin
ArrestBobRubin's picture

This stinks like a hit mates.

As always:

1) Cui bono? Who benefits?

2) FtM: follow the money

Thu, 08/02/2012 - 14:15 | 2673230 walküre
walküre's picture


Get Your Money Out Now

The biggest MM goes belly up. The market is about to be closed.


Thu, 08/02/2012 - 14:12 | 2673212 monopoly
monopoly's picture

And Poof! Its gone.

Thu, 08/02/2012 - 14:14 | 2673222 whoopsing
whoopsing's picture

CCCorzined !

Thu, 08/02/2012 - 14:15 | 2673226 Cult_of_Reason
Cult_of_Reason's picture

I am pulling my money from Knight (have two indirect futures accounts with them). It is better to be safe than MF Global sorry. I refuse to be Corzined. I want my money now! No ifs or buts.

Thu, 08/02/2012 - 14:16 | 2673233 walküre
walküre's picture

too late

Thu, 08/02/2012 - 14:20 | 2673248 Cult_of_Reason
Cult_of_Reason's picture

No, it is not. They told me "believe us" check is in the mail.

But seriously, I have money with Knight. Am I really screwed now? I talked to CFTC, Knight and Penson, all told me they are monitoring the funds.

Thu, 08/02/2012 - 14:34 | 2673311 Money 4 Nothing
Money 4 Nothing's picture

The Big Boys faces are in the money trough right now.. wait your turn Muppet..

Thu, 08/02/2012 - 14:51 | 2673383 Cult_of_Reason
Cult_of_Reason's picture

Covered and liquidated everything that I had through Knight, 100% in cash, requested everything to be wired out, trying to get my money out before they file for bankruptcy.

Thu, 08/02/2012 - 15:08 | 2673441 Cult_of_Reason
Cult_of_Reason's picture

Knight states that they are in "full compliance with our net capital requirements and we are in constant contact with the regulatory bodies" (whatever that means).

The guy told me that cash will go automatically to CFTC protected accounts (that suppose to be safe), but if you hold any positions overnight (as e-mini futures) you could find out that you do not have anything in the morning.

That was very encouraging (at least he was honest).




Thu, 08/02/2012 - 16:25 | 2673848 OneTinSoldier66
OneTinSoldier66's picture

Do Bank runs start with Broker runs?

Thu, 08/02/2012 - 20:41 | 2674488 TooBearish
TooBearish's picture

Good luk too u Mr Cult, the  CFTC's track record is about 100% in NOT protecting customer seg funds, pls keep us posted on your success...

Thu, 08/02/2012 - 14:37 | 2673329 walküre
walküre's picture

"monitoring" ??

like they're sitting armed to the teeth behind your stack of cash?

if not, you're probably screwed


Thu, 08/02/2012 - 14:54 | 2673393 Cult_of_Reason
Cult_of_Reason's picture

If I don't get my money, Gensler will pay me from his personal bank account. I will make him pay.

Thu, 08/02/2012 - 14:53 | 2673387 NotApplicable
NotApplicable's picture

I would guess that "monitoring" equals "stopping withdrawals" in order to ensure "solvency."

Keep us informed, though, please.

Fri, 08/03/2012 - 02:48 | 2675004 Sir Humphrey
Thu, 08/02/2012 - 14:17 | 2673239 Meesohaawnee
Meesohaawnee's picture

why are a few images of Warden Norton in Shawshank going thru my head?

Thu, 08/02/2012 - 14:17 | 2673240 Papasmurf
Papasmurf's picture

Why are there no capital limits on dark pool firms like there is for someone buying silver or gold?

Thu, 08/02/2012 - 14:18 | 2673242 bob_dabolina
bob_dabolina's picture

Egan Jones is the only financial related entity with any kind of credibility.

Eric Holder should sue them A.S.A.P

Thu, 08/02/2012 - 14:37 | 2673328 gmrpeabody
gmrpeabody's picture

To be sure..., they are already in the AG's sights I'd wager.

Thu, 08/02/2012 - 14:19 | 2673245 The Axe
The Axe's picture

Tyler   same deal as jefferies......Nite guys will step-up and buy the

Thu, 08/02/2012 - 14:21 | 2673256 DanP1966
DanP1966's picture
This was no accident.

This was no glitch.

This was intentional.

It was either a hack or an employee.

It was either to just hurt the firm or it was a theft.

Key, High Risk, applications do not just go haywire on an upgrade and completely reverse their logic and override any checks.

This algo was buying at the offer and selling at the bid.

NO WAY that happens by accident.
Thu, 08/02/2012 - 14:42 | 2673282 Money 4 Nothing
Money 4 Nothing's picture

I am inclined to agree with you 100%. I don't believe in coincidences.

Thu, 08/02/2012 - 14:34 | 2673316 Dr. Engali
Dr. Engali's picture

Ageed . The system is being dismantled piece by piece.

Thu, 08/02/2012 - 15:03 | 2673423 NotApplicable
NotApplicable's picture

To be portrayed as Marx's "inevitable death of Capitalism."

Well, assuming they can keep the murder weapons out of view.

Thu, 08/02/2012 - 15:43 | 2673623 ArrestBobRubin
ArrestBobRubin's picture

Pretty good. But I scooped you by 11 minutes :-)

Thu, 08/02/2012 - 14:23 | 2673258 Dr. Engali
Dr. Engali's picture

Has Cramer declared Knight Capital as being "fine" yet?

Thu, 08/02/2012 - 15:12 | 2673463 Nobody For President
Nobody For President's picture

Not yet, but we do have this this morning in a (where the hell else) CNBC article:

"Patrick O'Shaugnessy at Raymond James downgraded Knight from “strong buy” to “market perform,” saying "these events will limit Knight's earnings multiple expansion due to perceived risks of its market-making business model."


What the fuck world do these so-called analysts live in? If Knight is a 'market perform', it is way past time to short to shit out of the entire sector. Just unbelievable. Knight ain't even toast, it is way to hell burnt bread - pieces will be sold over the weekend.

Come to think of it, maybe that IS 'market perform'. Somehow, I just know that JPM is gonna make money on this...

Thu, 08/02/2012 - 14:23 | 2673262 SWCroaker
SWCroaker's picture

Makes you think. 

I just read a book, The Windup Girl, where a central feature of a dystopian future is that the major Agricultural Companies of tomorrow routinely Gene-Engineer viruses and phages that wipe out their competitor's crops.  At some point, mother nature's natural foodstuffs become viewed as competition too.

Now how ironic would it be if the HFT boys of today evolve into a business model of writing virus code to torpedo their HFT competition?  Everybody has their collocated servers crowded together at the exchange for speed, it would be easy enough to amble over and drop a USB drive in a competitor's server.   Something that looks for executables and flips the machine code for "greater than" into "less than" in a handful of instances on a weekly basis.

Makes more sense than Iranians looking for stuxnet revenge...

Just sayin'


Thu, 08/02/2012 - 15:50 | 2673663 pashley1411
pashley1411's picture

Occam's law, modern-edition; why attribute to malice what can equally be attributed to stupidity?

The data-entry temp left her glasses on the bus, supervisors were watching Olympic beach volleyball.  

efficiency vs. flexibility   HFT will very efficiently dump a generation of money out on the street.

Thu, 08/02/2012 - 17:25 | 2674068 r00t61
r00t61's picture

"Never attribute to malice that which is adequately explained by stupidity."

This is also known as Hanlon's razor.

Thu, 08/02/2012 - 14:28 | 2673291 Getting Old Sucks
Getting Old Sucks's picture

The curtin is being pulled back snd someday we will see what's behind it.  NOTHING.  Most will all be out of Dodge by then.  Ben, Jamie, Jon, Lloyd and Timmy will be the only ones on the trading floor co-mingling what left of everyone's assets into the FED, UST, FDIC, ect. etc....  To heroically save the country, of course.  Congress will tell them what a fine job they're doing and the country is grateful.

Thu, 08/02/2012 - 15:08 | 2673442 NotApplicable
NotApplicable's picture

We'll know the final act is approaching when these trigger-men suddenly seek retirement, to be replaced by the "Know-Nothings" fresh out of school.

I expect them all to be non-white, non-guys full of non-clues.

So... just what is Christina Romer up to these days, I wonder?

Thu, 08/02/2012 - 14:30 | 2673294 Money 4 Nothing
Money 4 Nothing's picture

IMHO, the Overt pillage of the Muppet's is now underway. It started when jon Corzinator's case set the tone with MF Global, said, "come on in boy's the water's fine!"

Thu, 08/02/2012 - 14:43 | 2673348 walküre
walküre's picture

If a banker has the choice between a poor(er) lifestyle and fleecing client accounts, what do you think he's going to do?

Markets are a crap shoot. There is no organic growth to service the capital. Someone is getting shafted.

When billionaire clients are the only ones left with money in the accounts, then it's their turn to bleed.


Thu, 08/02/2012 - 15:10 | 2673454 NotApplicable
NotApplicable's picture

Largest trial balloon to get off of the ground, EVAR!

Thu, 08/02/2012 - 14:34 | 2673319 Let The Wurlitz...
Let The Wurlitzer Play's picture

So when is Barry going to bail out Knight ??


Thu, 08/02/2012 - 14:45 | 2673360 Getting Old Sucks
Getting Old Sucks's picture

JPM, GS, WF, and Citi will divi up the spoils and clients.  That's the back door bail out.  Feed the small fries to the sharks cause the FDIC don't want to and can't pay if they go down.

Thu, 08/02/2012 - 14:46 | 2673359 Jlmadyson
Jlmadyson's picture

If it was a hit then god help us all. It's starting to unravel again.

On a week central bankers do not print?

Make ya say hmmmmmm.

My guess is it is way worse than anybody is willing to say...yet.

Thu, 08/02/2012 - 14:54 | 2673385 alien-IQ
alien-IQ's picture

KCG has been a contributor to it's own demise by being part of whats so very wrong with this market.

In short: Fuck em. Let them die a slow painful death. May the worms eat into their brains.

Good riddance to those motherfuckers.

Thu, 08/02/2012 - 15:01 | 2673413 NotApplicable
NotApplicable's picture

You say that like it was unintentional. Like "these motherfuckers" are gone.

Yet, the only thing that has disappeared is the shell called Knight that they gamed the world with.

There are always more shells.

These motherfuckers are behind every one of them.

And they appreciate it when you when you think they've lost, as it means you'll never see just how they won.

The shell may be dead, but the game goes on.

Thu, 08/02/2012 - 15:05 | 2673430 alien-IQ
alien-IQ's picture

don't pee in my cheerios man. We get so few moments to celebrate the (if only symbolic) demise of a group of scumbags that deserve far worse.

can I PLEASE enjoy my fleeting moment? Please?

Thu, 08/02/2012 - 15:12 | 2673462 NotApplicable
NotApplicable's picture

Sorry, the destruction of capital markets is no cause for celebration. Especially when the losses go into the asset column at JPM.

How many more FCMs must die in order to save their shorts?

Thu, 08/02/2012 - 15:19 | 2673496 alien-IQ
alien-IQ's picture

They fucked up. They get crushed.

Once upon a time, that was called Capitalism.

Thu, 08/02/2012 - 16:51 | 2673980 Papasmurf
Papasmurf's picture

Don't leap to conclusion.  Things may not be what they appear to be at first.

Thu, 08/02/2012 - 15:16 | 2673476 alien-IQ
alien-IQ's picture

Falling hard now on heavy volume. Could go below $2 before the bell at this rate.

I can't say I'm disappointed.

Thu, 08/02/2012 - 16:06 | 2673728 Vet4RonPaul
Vet4RonPaul's picture

EJ is the ZH of ratings agencies.

Thu, 08/02/2012 - 16:18 | 2673800 Mr_Wonderful
Mr_Wonderful's picture

Screw them. I think the market is doing its job well in taking them behind the woodshed and shooting them. That´s how the market is supposed to work. It´s a midget but still this market reaction is promising and should be a warning to the big players.

Do NOT follow this link or you will be banned from the site!