Knight Capital Group Inc. rejected a $500 million rescue-loan offer from Citadel LLC on Aug. 5 as it worked on a competing plan from a group of investors, said two people with knowledge of the matter.

The loan terms would have given Citadel a minority stake in Jersey City, New Jersey-based Knight’s stock (KCG) and an interest in the market maker’s HotSpot foreign-exchange subsidiary, said the people, who spoke on condition of anonymity because the talks were private. Citadel, the $12.5 billion hedge fund run by Ken Griffin, has a market-making and electronic-trading business.

Citadel, which had walked away from a previous round of talks on Aug. 4, made the offer as Knight Capital was completing a different rescue plan, a $400 million capital infusion from a group of investors led by Jefferies Group Inc. (JEF) That transaction, which gives the new investors rights to take a more than 70 percent stake in Knight, was completed on Aug. 6.

“Knight explored a wide range of alternatives,” Kara Fitzsimmons, a spokeswoman for Knight Capital, said in an e- mailed statement. “After a thorough review, Knight determined that the $400 million equity investment was the best and only alternative for the company and its shareholders.”

Katie Spring, a Citadel spokeswoman, declined to comment.

Knight sought the lifeline after a programming malfunction spewed orders through exchanges Aug. 1 and saddled the company with a $440 million trading loss.

To contact the reporter on this story: Zachary R. Mider in New York at zmider1@bloomberg.net;

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net