The U.S. Securities and Exchange Commission should examine whether an emphasis on trading speed is threatening the stock market, said Stifel Financial Corp. (SF:US) Chief Executive Officer Ronald Kruszewski.
“The SEC needs to make sure that the quest for speed in market execution is offset by stability,” Kruszewski said in an interview today on Bloomberg Television’s “Market Makers.” “These systems need to work 100 percent of the time. Speed is not everything here.”
Stifel Financial, a St. Louis-based brokerage, was one of six investors that agreed to buy $400 million of convertible preferred securities in Knight Capital Group Inc. yesterday. Knight Capital, led by Chairman and CEO Thomas Joyce, lost $440 million after a computer malfunction last week caused the Jersey City, New Jersey-based company to take on trading positions it didn’t want. Knight Capital’s stock price (KCG:US) fell to $3.07 yesterday from $10.33 on July 31, the day before the error.
Although Kruszewski said Knight had “alternatives” it could have pursued, he said the group he participated in was able to provide $400 million quickly because they understood the business. Jefferies Group Inc. (JEF:US) was the lead investor in a group that also included Blackstone Group LP (BX:US), Getco LLC, Stephens Inc. and TD Ameritrade Holding Corp. (AMTD:US), Kruszewski said.
“Time was the enemy here, the deal needed to be done, the markets needed the confidence that they would have the capital to conduct business,” Kruszewski said.
Stifel and the other investors wanted to help Knight survive, although “markets functioned very well last week when Knight turned off its systems,” he said. “The market needs competition in what they do. They’re one of the largest providers of liquidity in the markets, and we wanted to see them stay around.”
Kruszewski said the loss imposed on Knight Capital shareholders should serve as a warning to other financial firms to improve their systems.
“The best regulator is free-market capitalism -- look at what happened here, the shareholders took a loss,” Kruszewski said. “This is probably the best incentive you can have to make sure this does not happen again.”
He said he’s persuaded that Knight Capital won’t have similar problems in the future and that the management team led by Joyce will build value for shareholders.
“What happened last week, based on my due diligence, was a black-swan event,” Kruszewski said, referring to the type of improbable occurrence described in Nassim Taleb’s 2007 book “The Black Swan.” “I believe that Knight management and in particular Tom Joyce is very capable and strong and they have a good business model.”
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