Knight Capital gets credit line, but customers stay away

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By Edward Krudy

(Reuters) - Embattled Knight Capital Group Inc has obtained a credit line that will allow the brokerage to operate for the day, helping its shares regain some ground, but major customers were still not sending trades to the company on Friday.

In morning trading, Knight's shares jumped more than 30 percent to $3.36 after losing 75 percent over the past two days. However, mutual fund giants Vanguard Group and Fidelity Investments were still not routing trades to Knight Capital, the nation's largest market maker.

Knight Capital told brokers that it has obtained a line of credit that will allow the day's operation, the Wall Street Journal reported. The company's spokesperson was not immediately available for comment.

A software glitch on Wednesday flooded the New York Stock Exchange with unintended orders for dozens of stocks, boosting some shares by more than 100 percent and leaving the largest U.S. retail market maker with a trading loss of $440 million, imperiling its survival.

Securities regulators are looking into the matter closely. The U.S. Securities and Exchange Commission, in concert with other regulatory authorities, is now investigating what happened, a spokesman said late Thursday. The Financial Industry Regulatory Authority also has examiners on-site at the company.

For a market already suspicious that the system might be fundamentally broken after 2010's "Flash Crash" and the botched Facebook IPO in May, the troubles at Knight have only added fuel to the fire.

Barclays Capital, in a Friday note, said Knight's problem was now entirely a question of confidence.

"(Ultimately), and in short order, customers need to have confidence to transact with KCG, because without that revenue generation is impaired, and the impact on earnings consequently can make it difficult for the company to retain employees," analyst Roger Freeman wrote.

The mood outside Knight Capital's offices was dour on Friday, as security warned reporters not to harass employees coming in and out. Police officers were also present, and reporters were told to stay off the company's property.

One staffer, toting a set of golf clubs despite the catastrophe unfolding around him, said, "I don't want to care" when asked how things were going.

Another called the atmosphere at work "quiet, very quiet."

CUSTOMERS GONE

Things could be quieter still on Friday if Knight does not regain some of the major customers it has already lost. Knight was the top retail market maker in 2011 for NYSE- and Nasdaq-listed securities. Market makers execute buy and sell orders on behalf of customers and step in to provide liquidity to ensure orderly trading.

Several large retail brokerages said Thursday they were routing orders to other market makers. Fidelity was not sending trades there on Friday, according to sources familiar with the firm, and Vanguard said it was also avoiding Knight.

On Thursday, TD Ameritrade, Scottrade, E*Trade, BNY Mellon subsidiary Pershing LLC, and Invesco all said they were shifting orders elsewhere.

Knight has set up a room for potential suitors to examine its books as it seeks financing to remain operational, according to a source familiar with the matter. Concerns have surfaced as to whether the company has adequate capital to maintain its trading volume.

(Additional reporting by Angela Moon, Jed Horowitz and Suzanne Barlyn in New York and Sarah Lynch in Washington; writing by David Gaffen and Ben Berkowitz in New York; Editing by Edward Tobin, Lisa Von Ahn and Steve Orlofsky)

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