PlanMaestro Posted August 3, 2012 Share Posted August 3, 2012 Can somebody analyze the situation and share? Knight is not a bad firm (I was starting to look into them while analyzing Jefferies) ... but I'm into other priorities for the moment. http://www.ft.com/intl/cms/s/0/25c7c79a-dca0-11e1-bbdc-00144feab49a.html#axzz22SCgtDyw http://www.fool.com/investing/general/2012/08/03/why-knight-capitals-shares-got-decimated.aspx#.UBthKY6aQoQ Thomas Joyce, Knight chief executive, said the brokerage “was open for business”. Knight, which reported $365m in cash for the quarter ending June 30, said it was looking at financing options to strengthen its capital base. ..... The Financial Industry Regulatory Authority, a self-regulatory body, said Knight was still meeting capital requirements late Thursday. “Finra is closely monitoring the firm’s capital, and at present they are in compliance with net capital requirements. Finra currently has examiners on site.” .... Sean Egan, principal of Egan-Jones Ratings, estimated Knight would have to raise $600m in new equity, but given its current market valuation would likely be able to secure only a fraction of the amount needed. “The rule of thumb for equity raising was around 25 per cent of your market capitalisation,” he said. Link to comment Share on other sites More sharing options...
Grenville Posted August 3, 2012 Share Posted August 3, 2012 Only thing I briefly looked at was the proxy and Joyce, the CEO owns 1.5mln shares or 1.5% of the common, and his 2011 cash salary was 4.5mln. I don't see him too worried if the common gets diluted. Also it took 45mins for them to shut down the software, when it seemed like they knew something was wrong sooner than that. Link to comment Share on other sites More sharing options...
Green King Posted August 3, 2012 Share Posted August 3, 2012 Can someone give a crash course on Market making ? Is it very hard to break into ? (competitive advantages) How hard will it be to get from #2 to #1 in the industry ? Link to comment Share on other sites More sharing options...
limbacmf Posted August 3, 2012 Share Posted August 3, 2012 Knight Capital in talks with Virtu Financial http://www.reuters.com/article/2012/08/02/us-knightcapital-virtu-idUSBRE8711E420120802 Link to comment Share on other sites More sharing options...
LC Posted August 3, 2012 Share Posted August 3, 2012 Can someone give a crash course on Market making ? Is it very hard to break into ? (competitive advantages) How hard will it be to get from #2 to #1 in the industry ? Market making is about speed and algorithmic innovation. The MM with the fastest connection wins, all else equal. This requires a lot of tech reinvestment to keep updating hardware and connections to stay ahead of the game. However most firms have the means to get the best tech. So it comes down to the quality of your algos. Those with the best talent can outmaneuver competitors to find & provide liquidity where it is needed. So winning in the MM arena is make the best tech allocation investments and attract the best talent. But IMHO it's not extremely difficult to become the winner in this industry. If your quants have a light-bulb moment and design a great algo, you can dominate the industry overnight. Link to comment Share on other sites More sharing options...
writser Posted August 3, 2012 Share Posted August 3, 2012 Can someone give a crash course on Market making ? Is it very hard to break into ? (competitive advantages) How hard will it be to get from #2 to #1 in the industry ? Market making is about speed and algorithmic innovation. The MM with the fastest connection wins, all else equal. This requires a lot of tech reinvestment to keep updating hardware and connections to stay ahead of the game. However most firms have the means to get the best tech. So it comes down to the quality of your algos. Those with the best talent can outmaneuver competitors to find & provide liquidity where it is needed. So winning in the MM arena is make the best tech allocation investments and attract the best talent. But IMHO it's not extremely difficult to become the winner in this industry. If your quants have a light-bulb moment and design a great algo, you can dominate the industry overnight. The first part of your post makes sense. The second part doesn't. If a quant with a light-bulb moment can dominate the industry overnight, you have no moat at all! I work at a different HFT firm - the industry is extremely competitive. I wouldn't say any company in our sector has a moat like Coca Cola or Microsoft. Electronic stock exchanges are almost anonymous and nobody outside the industry had ever heard about KCG before the disaster. I think that if there is a moat it is in the IP of the company and the people who work there. And KCG could lose a lot of their IP now, either because they have to axe a boatload of people, or because the bonus pool is empty now and employees leave the sinking ship. Another part of their moat (and revenue stream) is formed by their institutional client base and their proprietary trading platforms. Guess what will happen here after KCG has shown that their IT systems are capable of blowing up, their risk monitoring is worthless and they are in dire need of more capital. Would that be your preferred counterparty? And what about the reactions from the media + general public after another accident caused by "rogue computers" pillaging the market (in fact these guys gave 400$ million away to other market participants. I have no clue why anyone should have a problem with that, but apparently it is fine if KCG makes a lot of money quietly, but it is terrible if they piss it all away in a single trading session :) ). Wouldn't surprise me if the SEC launches a probe, or if congress panics and passes a bill to annoy HFT-ers (this already happened in France). KCG might survive and if it does it could be a 4-bagger but there is definitely no margin of safety here. If forced to do something I would buy some options, but they are probably extremely expensive now. Link to comment Share on other sites More sharing options...
Grenville Posted August 3, 2012 Share Posted August 3, 2012 Goldman Sachs Charged Knight $440 Million for Unwind http://www.cnbc.com/id/48489000 Link to comment Share on other sites More sharing options...
Green King Posted August 3, 2012 Share Posted August 3, 2012 Thanks for the response Can someone give a crash course on Market making ? Is it very hard to break into ? (competitive advantages) How hard will it be to get from #2 to #1 in the industry ? Market making is about speed and algorithmic innovation. The MM with the fastest connection wins, all else equal. This requires a lot of tech reinvestment to keep updating hardware and connections to stay ahead of the game. However most firms have the means to get the best tech. So it comes down to the quality of your algos. Those with the best talent can outmaneuver competitors to find & provide liquidity where it is needed. So winning in the MM arena is make the best tech allocation investments and attract the best talent. But IMHO it's not extremely difficult to become the winner in this industry. If your quants have a light-bulb moment and design a great algo, you can dominate the industry overnight. The first part of your post makes sense. The second part doesn't. If a quant with a light-bulb moment can dominate the industry overnight, you have no moat at all! I work at a different HFT firm - the industry is extremely competitive. I wouldn't say any company in our sector has a moat like Coca Cola or Microsoft. Electronic stock exchanges are almost anonymous and nobody outside the industry had ever heard about KCG before the disaster. I think that if there is a moat it is in the IP of the company and the people who work there. And KCG could lose a lot of their IP now, either because they have to axe a boatload of people, or because the bonus pool is empty now and employees leave the sinking ship. Another part of their moat (and revenue stream) is formed by their institutional client base and their proprietary trading platforms. Guess what will happen here after KCG has shown that their IT systems are capable of blowing up, their risk monitoring is worthless and they are in dire need of more capital. Would that be your preferred counterparty? And what about the reactions from the media + general public after another accident caused by "rogue computers" pillaging the market (in fact these guys gave 400$ million away to other market participants. I have no clue why anyone should have a problem with that, but apparently it is fine if KCG makes a lot of money quietly, but it is terrible if they piss it all away in a single trading session :) ). Wouldn't surprise me if the SEC launches a probe, or if congress panics and passes a bill to annoy HFT-ers (this already happened in France). KCG might survive and if it does it could be a 4-bagger but there is definitely no margin of safety here. If forced to do something I would buy some options, but they are probably extremely expensive now. Link to comment Share on other sites More sharing options...
berkshiremystery Posted August 3, 2012 Share Posted August 3, 2012 Knight Capital Group, Inc. (KCG) -NYSE $4.09 $1.51(+58.49%) 3:07PM EDT - Nasdaq Real Time Price Soros probably would have said, "invest first, investigate later",... if you would name some book title. Sure, the future might be uncertain of this company, but one neat heck of a ride in one session. If the only current real moat might be the market, the emotions of the market participants speculating about a suitor. So definitely not some Graham value cigarette butt. http://www.bloomberg.com/news/2012-08-02/knight-said-to-open-books-to-suitors-as-pressure-from-loss-grows.html?cmpid=yhoo Link to comment Share on other sites More sharing options...
Parsad Posted August 3, 2012 Share Posted August 3, 2012 Knight Capital Group, Inc. (KCG) -NYSE $4.09 $1.51(+58.49%) 3:07PM EDT - Nasdaq Real Time Price Soros probably would have said, "invest first, investigate later",... if you would name some book title. Sure, the future might be uncertain of this company, but one neat heck of a ride in one session. If the only current real moat might be the market, the emotions of the market participants speculating about a suitor. So definitely not some Graham value cigarette butt. http://www.bloomberg.com/news/2012-08-02/knight-said-to-open-books-to-suitors-as-pressure-from-loss-grows.html?cmpid=yhoo We did. Bought a shitload of out of the money call options. Up almost 200%! Should have bought a little more. We've already sold a third to cover our cost and are holding the rest. I'm hoping they get financing or an equity partner, rather than a buyout. Cheers! Link to comment Share on other sites More sharing options...
enoch01 Posted August 4, 2012 Share Posted August 4, 2012 Knight Capital Group, Inc. (KCG) -NYSE $4.09 $1.51(+58.49%) 3:07PM EDT - Nasdaq Real Time Price Soros probably would have said, "invest first, investigate later",... if you would name some book title. Sure, the future might be uncertain of this company, but one neat heck of a ride in one session. If the only current real moat might be the market, the emotions of the market participants speculating about a suitor. So definitely not some Graham value cigarette butt. http://www.bloomberg.com/news/2012-08-02/knight-said-to-open-books-to-suitors-as-pressure-from-loss-grows.html?cmpid=yhoo We did. Bought a shitload of out of the money call options. Up almost 200%! Should have bought a little more. We've already sold a third to cover our cost and are holding the rest. I'm hoping they get financing or an equity partner, rather than a buyout. Cheers! Nice one. I bought (and already sold) only the equity and made just a fraction of that. Should be an interesting weekend over there... Link to comment Share on other sites More sharing options...
BargainValueHunter Posted August 4, 2012 Share Posted August 4, 2012 Knight Capital Group, Inc. (KCG) -NYSE $4.09 $1.51(+58.49%) 3:07PM EDT - Nasdaq Real Time Price Soros probably would have said, "invest first, investigate later",... if you would name some book title. Sure, the future might be uncertain of this company, but one neat heck of a ride in one session. If the only current real moat might be the market, the emotions of the market participants speculating about a suitor. So definitely not some Graham value cigarette butt. http://www.bloomberg.com/news/2012-08-02/knight-said-to-open-books-to-suitors-as-pressure-from-loss-grows.html?cmpid=yhoo We did. Bought a shitload of out of the money call options. Up almost 200%! Should have bought a little more. We've already sold a third to cover our cost and are holding the rest. I'm hoping they get financing or an equity partner, rather than a buyout. Cheers! At one point this morning the earnings yield got up to 50%! If this had been a household name the bounceback would have led CBS News and the theme would have been "the little guy gets screwed again by Wall Street"... Link to comment Share on other sites More sharing options...
alertmeipp Posted August 4, 2012 Share Posted August 4, 2012 lol, u guys know this company could have gone down this weekend, right? Link to comment Share on other sites More sharing options...
berkshiremystery Posted August 4, 2012 Share Posted August 4, 2012 Knight Capital Group, Inc. (KCG) -NYSE $4.09 $1.51(+58.49%) 3:07PM EDT - Nasdaq Real Time Price Soros probably would have said, "invest first, investigate later",... if you would name some book title. Sure, the future might be uncertain of this company, but one neat heck of a ride in one session. If the only current real moat might be the market, the emotions of the market participants speculating about a suitor. So definitely not some Graham value cigarette butt. http://www.bloomberg.com/news/2012-08-02/knight-said-to-open-books-to-suitors-as-pressure-from-loss-grows.html?cmpid=yhoo We did. Bought a shitload of out of the money call options. Up almost 200%! Should have bought a little more. We've already sold a third to cover our cost and are holding the rest. I'm hoping they get financing or an equity partner, rather than a buyout. Cheers! Nice one. I bought (and already sold) only the equity and made just a fraction of that. Should be an interesting weekend over there... lol, u guys know this company could have gone down this weekend, right? 1+ Great call by Sanjeev,... pulling the trigger at the extreme vacuum point of uncertainty. For every 1 percentage risked of a 100 percentage points portfolio, this extacy bull ride of out of the money call options takes a 200% gain, to 2 additional points. Now 3 casion chips. Taking the original $1 (1/3) off the table and now only playing with the house money, the $2 (the other 2/3) gained. Not sure, how big of Sanjeev's original shitload was, but the portofolio gained some smelly bigger shitload now. ;D Link to comment Share on other sites More sharing options...
tombgrt Posted August 4, 2012 Share Posted August 4, 2012 Isn't customer trust the most important thing in Knight Capital's business? How did you determine the odds/reward ratio was likely in your favor Parsad? Are you even able to investigate the situation well enough in a matter of hours? I'd guess it's very hard to estimate in this kind of company but I could be wrong. "Invest first, investigate later" is pure speculation for the mere mortals of this world (imo). Don't think I'd ever buy* it, but I guess that general avoidance is one of the factors that creates bargains. Link to comment Share on other sites More sharing options...
berkshiremystery Posted August 4, 2012 Share Posted August 4, 2012 . Don't think I'd ever tough it, but I guess that general avoidance is one of the factors that creates bargains. Finally you got my thought, it's not pure speculation, because your main and hidden advantage is the bargain vacuum, that the lazy long term oriented value investor would ignore. Only if you act fast, very fast, you can take advantage of this very extreme value vacuun, and now it's only house money on the table that is still at stake. Link to comment Share on other sites More sharing options...
tombgrt Posted August 4, 2012 Share Posted August 4, 2012 What do you mean finally? It's my first post in this topic? It's only house money because you were proven right, correctly so or just by luck. The market is much more right than wrong in pricing, and in situations like these it is rarely very clear whether it is. That's why I'm wondering what Parsad's reasoning was behind this bet. :) *tough had to be "buy" of course in my previous post. Link to comment Share on other sites More sharing options...
Green King Posted August 4, 2012 Share Posted August 4, 2012 Was surprised by the buy. would not have done it based on what i know. Seems like there is safety in the earnings but who knows. Too advanced for my abilities Do you mind telling us how big a allocation it was ? 1% 5% 10% 15% 20% ? Link to comment Share on other sites More sharing options...
berkshiremystery Posted August 4, 2012 Share Posted August 4, 2012 What do you mean finally? It's my first post in this topic? sorry,... shouldn't have used the word "finally",... just realized it now that this is your first post in this thread Link to comment Share on other sites More sharing options...
PlanMaestro Posted August 4, 2012 Author Share Posted August 4, 2012 Well, I don't know Parsad's thinking but this was mine after reading KCG's balance sheet last week: * Very conservative leverage: 5:1 (?) and around 8:1(?) after loses * No level 3 assets: balance sheet marked to market that could be reduced fast. * Valuation with margin of safety for further loses: 0.2x BV after loses So it seemed to me they could reduce fast their balance sheet, like Jefferies did at the end of last year, if repo lines were pulled. Also this was no Lehman leveraged 30:1 and a huge Real Estate business. Big drawback is that they can't count on the FED like the big boys. Of course loses can be much higher and also did not go into the business details (was thinking more about Jefferies) but my first impression is that the market is too pessimistic and there should/could get financing. Back to swimming in a turquoise sea and focus on Mrs. There are priorities. Link to comment Share on other sites More sharing options...
alertmeipp Posted August 4, 2012 Share Posted August 4, 2012 their survival was mainly rely on whether its counter-parties will route the order back to them given that fact they obviously has a process fault. JEF is investment bank and this is market maker. Link to comment Share on other sites More sharing options...
PlanMaestro Posted August 4, 2012 Author Share Posted August 4, 2012 their survival was mainly rely on whether its counter-parties will route the order back to them given that fact they obviously has a process fault. JEF is investment bank and this is market maker. 70% of the balance sheet is trading and corporate. Loses could be substantially higher but they were well capitalized. Link to comment Share on other sites More sharing options...
alertmeipp Posted August 4, 2012 Share Posted August 4, 2012 their survival was mainly rely on whether its counter-parties will route the order back to them given that fact they obviously has a process fault. JEF is investment bank and this is market maker. 70% of the balance sheet is trading and corporate. Loses could be substantially higher but they were well capitalized. I don't think it was balance sheet issue. But what do I know. Link to comment Share on other sites More sharing options...
PlanMaestro Posted August 4, 2012 Author Share Posted August 4, 2012 I don't think it was balance sheet issue. But what do I know. ... and I'm in swim trunks stealing internet time here and there: lacking info with a fragile memory. Link to comment Share on other sites More sharing options...
Parsad Posted August 4, 2012 Share Posted August 4, 2012 Was surprised by the buy. would not have done it based on what i know. Seems like there is safety in the earnings but who knows. Too advanced for my abilities Do you mind telling us how big a allocation it was ? 1% 5% 10% 15% 20% ? Small. What do you mean finally? It's my first post in this topic? It's only house money because you were proven right, correctly so or just by luck. The market is much more right than wrong in pricing, and in situations like these it is rarely very clear whether it is. That's why I'm wondering what Parsad's reasoning was behind this bet. :) *tough had to be "buy" of course in my previous post. It will be discussed in the 3rd quarter letter...and exactly what will be said will depend ultimately on the outcome! ;D Cheers! Link to comment Share on other sites More sharing options...
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