By Edward Krudy
NEW YORK, Aug 2 (Reuters) - Knight Capital Group Inc is being forced to raise money after an erroneous trading position wiped out $440 million of its capital, the firm said on Thursday, causing its shares to shed more than half of their value.
Problems at Knight, one of the largest firms that buys and sells stocks to provide liquidity to the markets, emerged at the beginning of trading on Wednesday.
"The company is actively pursuing its strategic and financing alternatives to strengthen its capital base," Knight said in a statement. Knight's shares fell 53 percent to $3.24, hitting an all-time low.
Knight has already approached JPMorgan for emergency funding, according to a report on Fox News. But it was unclear if that funding would be granted. A spokeswoman for JPMorgan declined to comment.
The firm said its broker/dealer divisions would open for business as usual on Thursday, adding that despite the impact of the trading loss, it was in compliance with capital requirements. It also said it had traded out of the entire position.
Wednesday's technology breakdown roiled the prices of some 140 stocks listed on the New York Stock Exchange, undermining fragile investor confidence in the stability of U.S. stock markets.
The trading glitches are the latest in a series of market snafus that have eroded retail investors' confidence. Others include the botched Facebook Inc initial public offering, the 2010 "flash crash" in which nearly $1 trillion in market value disappeared in minutes, and the failed public offering of BATS Global Markets, a rival to the NYSE and the Nasdaq .
Specialists in securities industry operations issues said the wave of recent problems points to an unsettling reliance on automated trading facilities that is robbing investors of confidence in the markets.
"We're losing the human control in our business," said Joe Anastasio, a founding partner of financial services consulting firm Capco who specializes in stock trading issues. "We've been so focused on automated throughput of orders and high-volume execution with no human intervention that we have lost the human logic factor when things go wrong."
One of the problems, he said, is that millions of orders stack up overnight for automatic execution at the opening of trading, creating a deluge of bad trades related to a single error.
Knight said its principal broker-dealer subsidiaries were fully compliant with their net capital requirements despite the pretax loss of about $440 million that has "severely impacted" the parent company's capital base.
A broker-dealer can make loans or pay dividends to its parent company and affiliates without regulatory approval as long as the transaction does not affect its excess net capital by 30 percent or more.
On July 18, Knight reported second-quarter earnings of $3.3 million, down 81 percent from a year earlier after recording a $35.4 million pretax trading loss from the Facebook initial public offering. The company has not yet filed its second-quarter report with regulators.
The company, on average, had daily U.S. market-making volume of $19.5 billion in June. (Reporting by Edward Krudy; Editing by James Dalgleish and Lisa Von Ahn)