KC / COUNTERPARTY FILE03 AUG 2012   /   01
Decision note · Public record through August 3, 2012

A capital bridge, not a clean bill of liquidity.

Do not rely on Knight continuing normal operations without new capital unless current funding and capital records demonstrate it can carry the next trading day. Set contingency capacity now. This is a risk decision, not a finding of insolvency or a legal requirement to raise capital.

Conditional financing call
Require evidence before extending ordinary reliance. Reconsider if current broker-dealer net-capital computations, unrestricted cash and settlement reconciliations, clearing and counterparty funding requirements, customer-flow records, and executed financing commitments demonstrate capacity through the next trading day.
01 / Exposure

Equity against the reported loss

Last reported balance sheet: June 30, 2012 [KC1]. Issuer incident update: August 2, 2012 [KC2]. The source columns are scaled by a factor of 1,000.

Mechanical pre-tax equity subtraction, not a new pro forma financial statement
June 30 reported total equity KC1 · balance sheet$1,496,966,000
Approximate realized pre-tax trading loss KC2 · August 2 statement− $440,000,000
Mechanical pre-tax remainder June equity less approximate loss · KC1 + KC2$1,056,966,000

Different dates and a pre-tax estimate. This subtraction does not update the balance sheet, account for taxes or other intervening changes, or compute regulatory net capital.

June equity compared with the approximate realized pre-tax loss Zero-baseline bars: June equity from KC1 and approximate realized pre-tax loss from KC2. Dollar figures and ratios also appear in the table and adjacent text. KC1 · equity $1,496,966,000 KC2 · loss $440,000,000 $0 · shared zero baseline
Both bars begin at zero; their lengths encode reported June equity and the approximate later loss. Labels link to the issuer records KC1 and KC2.
02 / Evidence boundary

What the issuer said, and what remains open

On the record [KC2]

  • The technology issue was related to installation of trading software; Knight sent numerous erroneous NYSE-listed orders and said the software was removed.
  • Knight said it had traded out of the entire erroneous trade position and reported an approximate realized pre-tax loss of $440,000,000.
  • It said its broker-dealer subsidiaries were in full compliance with net-capital requirements, would continue trading and market making at that day's opening, and were pursuing strategic and financing alternatives.

Not established by these records

  • The exact software defect or root cause is not identified. An installation relationship does not describe a code-level mechanism.
  • A realized pre-tax trading loss is not automatically a dollar-for-dollar change in unrestricted cash: settlement timing, trading balances, financing, and restricted or customer assets require separate records.
  • June balance-sheet cash cannot tell us current regulatory capital, funding requirements, customer withdrawal risk, tax effect, or next trading day's liquidity. Compliance stated on August 2 is not proof of later liquidity.
“As previously disclosed, Knight experienced a technology issue at the open of trading at the NYSE yesterday, August 1st. This issue was related to Knight’s installation of trading software and resulted in Knight sending numerous erroneous orders in NYSE-listed securities into the market. This software has been removed from the company’s systems.”Issuer wording, August 2 release [KC2]
03 / Stress dial

An additional loss, only if you choose one

The sourced baseline remains the issuer's approximate realized pre-tax loss of $440,000,000 [KC2]. Move the control to add a hypothetical pre-tax loss; this is neither another known exposure nor a forecast. The comparison still begins with June equity.

Use touch, arrow keys, or Page Up and Page Down. Zero adds nothing to the reported loss.

Hypothetical addition$0
Mechanical equity remaining$1,056,966,000
Combined share of June equity lost29.39%

Static baseline, including every amount and ratio, appears above if scripts are unavailable. The control changes only this hypothetical display.

04 / Provenance

Records available at this date