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Why Knight Capital's Shares Got Stomped

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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 firm Knight Capital Group (NYSE: KCG  ) were getting clubbed by the market today, falling as much as 36% in intraday trading after the company announced that it had reached a rescue plan with investors.

So what: After a painful trading-software glitch whacked Knight Capital to the tune of $440 million, the company spent the weekend working with advisors to secure a financing deal that would provide Knight with much-needed liquidity. The good news? It secured a deal. Private-equity giant Blackstone (NYSE: BX  ) stepped in, along with close competitor Getco, TD Ameritrade (Nasdaq: AMTD  ) , Stifel Financial (NYSE: SF  ) , Jefferies Group (NYSE: JEF  ) , and Stephens.

But there's also bad news. The deal gives the new investors convertible preferred shares that yield 2% and are convertible at $1.50. That would work out to around 73% ownership for the consortium, at a greatly-discounted price.

Now what: To a large extent, it looks like investors who owned the company prior to the software screw up are simply hosed. The company lost what amounts to around four years of profit -- a ton of shareholder value was destroyed here.

Looking ahead, though, the firm has been saved, and it now has a bunch of deep-pocketed investors on the hook. That not only shores up the balance sheet right now, but it should also be encouraging to customers who were initially wary about routing through Knight. There may actually be reason to be bullish on the business -- at least, in relation to last week. The challenge though, is for investors -- both current and prospective -- to figure out whether today's further-discounted price is attractive in light of the considerable dilution.

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

Motley Fool newsletter services have recommended buying shares of TD Ameritrade Holding. Motley Fool newsletter services have recommended creating a write puts position in TD Ameritrade Holding. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Matt Koppenheffer owns shares of Blackstone, but does not have a financial interest in any of the other 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 Facebook. The Fool’s disclosure policy prefers dividends over a sharp stick in the eye.

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