Buyers eye Knight Capital as customers stay away

At least one private equity firm had signed a non-disclosure agreement, a signal that it was looking at Knight's books for a potential acquisition or investment. Other private equity firms said they would be looking at Knight, which lost USD 440 million after a software glitch flooded the stock market with errant trades on Wednesday.

There were also unconfirmed reports that Knight had secured a credit line to keep it operating.

Major customers, including mutual fund giants Vanguard Group and Fidelity Investments, as well as retail broker TD Ameritrade , said they were still not routing trades to Knight, which in 2011 was the largest US retail market maker.

That had the effect of reducing Knight's share of daily market-making volume to a fraction of its normal activity.

"We continue to take a day-by-day approach in evaluating when it would be appropriate to begin routing through Knight again," said TD Ameritrade spokeswoman Beth Evegan.

Market makers buy and sell shares for clients and provide liquidity to the equity market by stepping in to buy and sell to insure orderly, smooth activity.

For example, through Tuesday of this year, Knight accounted for 20% of the market making activity in shares of Apple , one of the most actively traded stocks on a daily basis. By midday Friday, Knight was the market maker for just 2% of the share volume, according to Thomson Reuters data.

"A lot of buyside firms have got us on hold for now," said one Knight trader, who did not give his name because he is not authorized to speak to the press.

A source at TA Associates, a private equity firm based in Boston, said the company had signed a non-disclosure agreement.

One private equity investor said he suspects that eventually Knight will get broken up. "Knight has many more businesses than just the equity market making business. Some are good and some are not," he said. "I'm not sure who would want them all."

Separately, The Wall Street Journal reported the company told brokers it had obtained a line of credit, but the company would not confirm that report. Sources at other firms said that they'd heard that news only from reporters.

The line of credit could address concerns that have surfaced as to whether the company has adequate capital to maintain its trading.

ATMOSPHERE AT KNIGHT 'QUIET'

Knight's problems started when a software glitch flooded the New York Stock Exchange with unintended orders for dozens of stocks, boosting some shares by more than 100% and leaving the company with losses that now imperil its business.

Securities regulators are looking into the matter closely. The US Securities and Exchange Commission, in concert with other regulatory authorities, is investigating what happened, a spokesman said late Thursday. The Financial Industry Regulatory Authority, the industry self-regulator, also has examiners on-site at the company's headquarters in Jersey City, New Jersey.

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.

Knight's shares were up 28% to USD 3.30 on Friday after losing 75% of their value over the past two days.

Outside Knight Capital's Jersey City offices, 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."

One trader said staff had received no announcements from management as yet but described the atmosphere as "definitely better than yesterday," with people trying to carry on as usual.

But he noted the company's future remained in doubt.

"I thought by this morning we might have heard something. I think a lot of this stuff might get done over the weekend, maybe Monday the latest," he said.