Knight Asked SEC to Cancel Trades – SEC Did the Right Thing: They Said NO

From the WSJ:

“…Three hours after a software glitch unleashed a wave of erratic trades on Wednesday, leaving Knight holding at least $4.5 billion worth of securities it hadn’t planned to buy, firm Chief Executive Thomas Joyce was on the phone with Mary Schapiro, chairman of the Securities and Exchange Commission.

Mr. Joyce pressed the SEC chief to allow the firm to cancel many of the trades, according to people with knowledge of the discussions.

The conversation helped seal Knight’s immediate fate. From her vacation spot in Maine, Ms. Schapiro rejected Mr. Joyce’s entreaties, setting in motion the firm’s scramble. …”

Here’s another fascinating tidbit:¬† the NYSE had to cut the cord with Knight!

“The millions of trades, which came as the stock market opened at 9.30 a.m. Wednesday morning, covered almost 150 stocks from Berkshire Hathaway Inc. to Herbalife Ltd.

Traders and exchange officials were initially mystified at the bizarre trades but quickly the source was identified as a computer system used by Knight that fed trades to the New York Stock Exchange.

The trades were fired off a day after Knight installed software related to the launch of a New York Stock Exchange platform aimed at attracting more retail investors. On Wednesday morning at about 9:35 a.m., traders working on NYSE’s floor noticed unusual activity coming from Knight, and within minutes exchange officials called the firm. Over the next 20 minutes, Knight and the NYSE worked together to identify the problem, people familiar with the discussions said.

At about 10 a.m., NYSE officials took the dramatic step of cutting off Knight’s access to the exchange, the people said. Only after Knight reverted to its old software did the brokerage resume trading with the NYSE, the people said.”

And from Knight’s press release this morning: they got the NYSE to change the rules about shareholder votes:

“Because the shares issued represent, on an as-converted basis, approximately 73% of the outstanding common stock of Knight on a post-issuance basis, the issuance of convertible preferred stock would normally have required approval of Knight’s stockholders according to the Shareholder Approval Policy of the New York Stock Exchange (the “Exchange”). However, the Audit Committee of the Board of Directors of Knight determined that the delay necessary in securing stockholder approval prior to the issuance of the preferred stock would seriously jeopardize the financial viability of Knight. Because of that determination, the Audit Committee expressly approved Knight’s reliance on an exception provided in the Exchange’s shareholder approval policy for such a situation and Knight’s omission to seek the stockholder approval that would otherwise have been required under the Exchange’s policy. In connection with Knight’s request for the exceptional relief granted by the Exchange, Knight informed the Exchange regarding the circumstances that would have existed in the absence of a capital infusion transaction, including a liquidity situation in which it would not have been able to obtain necessary funds on an immediate basis because of the short cycle of Knight’s funding sources and the risk that daily funding sources necessary for Knight’s routine operations could cease to be available to Knight. The Exchange does not object to Knight’s use of the exception and expects to approve Knight’s listing application in relation to the proposed transaction on that basis.

Knight, in reliance on the exception, is mailing to all of its stockholders a letter notifying them that it issued the shares of common stock without seeking their approval. Reliance on the NYSE financial viability exception requires that the letter to stockholders be mailed to stockholders ten days prior to the date on which the convertible preferred shares can convert into common stock or vote as a class with common stock. However, the investors in Knight’s capital raise were not willing to undertake the transaction absent a reduction in that time period and, as a result, Knight requested specifically that the Exchange assist Knight in providing an accommodation to that time period in light of the exceptional circumstances relating to Knight and its need to complete the capital infusion before the markets opened for trading this morning. After considering Knight’s request and the nature of the time constraints under which Knight was operating, including the fact that Knight believed that without the capital infusion there would be no assurance that Knight’s counterparties would continue support Knight’s activities, the Exchange will file on Monday a proposed rule change to the U.S. Securities and Exchange Commission in a form that the Exchange anticipates will become immediately effective as proposed. In accordance with that rule change, on the date that is the later of August 11, 2012 and two days following the mailing of the letter to stockholders, the convertible preferred stock that would be convertible into more than 19.99% of Knight’s common stock outstanding prior to August 6, 2012 will, with respect to each investor, subject to notice from such investor that required regulatory approvals have been obtained,¬†become convertible into the underlying shares of Knight common stock and will become entitled to vote with the common stock on an as-converted basis.”

-KD

disclosure: no positions in $KCG

related:

Putting Together the Pieces of the Knight Capital Group Puzzle

Dear NYSE: Canceling Trades Destroys The Integrity of The Market

Dear Knight: Thanks for the Opportunity

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