Finance · Profile from Finance Research Companion
Knight Capital Group
The Jersey City market maker, founded in 1995 by Kenneth Pasternak and Walter Raquet, that became the largest wholesaler of US retail stock orders by paying brokers for their order flow, rode the 1990s online-trading boom to an IPO in 1998 and the top of the Nasdaq rankings in 1999, survived decimalisation, a founder's exit and a $79m customer-overcharging settlement, and then, on the morning of 1 August 2012, lost ~$440m (the SEC later said more than $460m) in about 45 minutes when a botched software deployment reactivated dead code on one of eight servers and sent more than 4 million unintended orders into the market. A $400m rescue by a Jefferies-led group five days later saved the firm but handed its new investors ~73% of it; within a year Knight had merged with the high-frequency trader Getco to form KCG Holdings, which Virtu Financial bought in 2017 for ~$1.4bn. Knight is the textbook case of operational risk in automated trading, and the first firm fined under the SEC's market-access rule.
At a glance
- Founded
- 1995, Jersey City, New Jersey, as Knight Securities (owned by Roundtable Partners), by Kenneth Pasternak and Walter Raquet; began Nasdaq and OTC market-making 24 July 1995; acquired Trimark Securities (listed-stock "third-market" making) in March 1995 (reported)
- Headquarters
- 545 Washington Boulevard, Jersey City, New Jersey (reported, verify)
- Ownership / structure
- Knight/Trimark Group IPO July 1998 (Nasdaq: NITE); renamed Knight Trading Group (2000) and Knight Capital Group (2005); moved to the NYSE in 2010 (ticker KCG, verify); merged into KCG Holdings 1 July 2013
- Leadership
- Kenneth Pasternak (CEO 1995–2002); Thomas Joyce (CEO 2002–2013, from Merrill Lynch); after 2013, Daniel Coleman (KCG CEO, from Getco)
- Segment
- Exchange and infrastructure: wholesale market making in US equities, institutional electronic execution, FX (Hotspot), fixed income (BondPoint), and earlier asset management (Deephaven)
- Scale
- 2011 revenue ~$1.40bn, net income ~$115m, ~1,450 employees (company, reported); in 2012 the largest trader of US equities by volume, with ~17% of NYSE- and Nasdaq-listed share volume (reported) and ~3.97bn shares a day in 2008 (reported)
- The loss
- 1 August 2012: ~$440m pre-tax (company); SEC order: >$460m; >4m executions in 154 stocks for >397m shares in ~45 minutes
- Rescue
- $400m convertible preferred (convertible at $1.50 a share, verify) from Jefferies ($125m), Blackstone, Getco, TD Ameritrade, Stephens and Stifel, agreed 5 August 2012
- End
- Merger with Getco to form KCG Holdings, closed 1 July 2013; KCG acquired by Virtu Financial for $20 a share (~$1.4bn), closed 20 July 2017
- Signature moves (incl. failures)
- Founding as a wholesaler (1995); IPO and dot-com boom (1998–2000); decimalisation squeeze (2001); Joyce turnaround and the 2004 SEC/NASD settlement; diversification (Hotspot FX, Direct Edge, 2006–10); Facebook IPO losses (2012); the 1 August 2012 trading loss; the rescue (2012); the SEC market-access fine (2013); Getco merger and Virtu sale (2013–17)
10 strategic moves analysed
Each one gets a full strategy file in the companion: context, the decision, the financing, what happened, and the lesson.
1995
Founding as a Wholesale Market Maker
Founding
1998
IPO and Dot Com Boom
IPO
2001
Decimalization Squeeze
Market-structure shock / restructuring
2002
Joyce Turnaround and 2004 SEC Settlement
Leadership change / regulatory settlement
2006
Diversification Hotspot FX and Direct Edge
Acquisition / diversification
2012
August 1 Software Glitch Trading Loss
Failure (operational)
2012
Facebook IPO Losses
Operational loss (third-party venue failure)
2012
Rescue Financing by Jefferies Led Group
Rescue / recapitalisation
2013
Getco Merger KCG and Virtu Sale
Merger / acquisition
2013
SEC Market Access Rule Fine
Regulatory settlement