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Why Knight Capital's Shares Got Decimated

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Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of trading house Knight Capital Group (NYSE: KCG  ) were lanced by the market today, losing more than 60% of their value after the company's high-profile computer-trading debacle.

So what: Yesterday was big. Really big. In the matter of just 45 minutes, an out-of-control trading algorithm had led to a gargantuan $440 million trading loss for Knight Capital.

This needs to be put in perspective. After all, it might seem on the small side for those thinking about JPMorgan Chase's (NYSE: JPM  ) multibillion-dollar loss at the hands of the London Whale. For Knight, $440 million represents more than 30% of its revenue for the past year. It's more than four times its trailing-12-month profit and $116 million more than its total profit between 2009 and 2011. It's also close to 30% of the company's shareholders' equity, so it's no wonder that Knight said in a press release that the event "severely impacted" the company's capital position.

Now what: This dismounted Knight needs a white knight, pronto. On Thursday, the company was frantically looking for a source of financial backing, if not a buyer for the entire company. Fox Business Network also reported that management is considering a bankruptcy filing.

For the markets, there were definitely some jitters introduced by the Knight glitch. For Knight though, 45 minutes may have been just enough to behead the company.

Want to keep up to date on Knight Capital Group? Add it to your Watchlist.

The Motley Fool owns shares of JPMorgan Chase. Motley Fool newsletter services formerly recommended JPMorgan Chase. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Matt Koppenheffer has nofinancial interest in any of the companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter, @KoppTheFool, or on Facebook. The Fool’s disclosure policy prefers dividends over a sharp stick in the eye.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 03, 2012, at 7:27 AM, Darkhorse29 wrote:

    This is enough to make you wonder if there is an algorithm doing short term trading that is designed to find and exploit just this sort of error.

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