Why Knight Capital's Shares Got Stomped

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 (NYS: 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 (NYS: BX) stepped in, along with close competitor Getco, TD Ameritrade (NAS: AMTD) , Stifel Financial (NYS: SF) , Jefferies Group (NYS: 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.

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The article Why Knight Capital's Shares Got Stomped originally appeared on Fool.com.

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