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When your business model is to execute trades profitably, it's pretty hard to destroy your franchise more effectively than contriving to lose $10 million a minute trying to do just that on the New York Stock Exchange. That's how much Knight Capital lost yesterday morning when its electronic trading algorithms malfunctioned, causing "the firm’s computers to rapidly buy and sell millions of shares in over a hundred stocks for about 45 minutes after the markets opened".
The damage in total: about $440 million. That's more than the $289 million in revenue the company earned last quarter; it's four times its annual profit. That's 40% of tangible book value. How bad is that? With its shares down 63% on the day, and more than 75% since the error, Knight is now trading at valuations similar to Morgan Stanley, Citigroup and Bank of America. It's now exploring that most ominous of financial euphemisms, "strategic alternatives".
This is a really bad time to do such exploring, and not just because of Knight's self-immolating tendencies, the WSJ reports:
Stock volumes are at a five-year low and volatility seemingly does nothing to bring trading activity back... There are a range of competitors in the wings trying to attack Knight’s core business, trading with the retail brokers. Goldman Sachs, Cantor Fitzgerald and the hedge fund firm Two Sigma have been gearing up in the business.