Interesting KNIGHT (NITE) clip. Knight Gets Spear

Interesting KNIGHT (NITE) clip.

Knight Gets Speared Right Off its High Horse. What Now... Buy It?

Maybe you're active enough in the markets to know who Knight is, maybe not. Regardless, what happened with Knight this week is a very major issue that could even suggest today's sharp move higher in the markets may have something to do with Knight's recent debacle.

First, we've talked about market makers a few times this week and their importance in the grand scheme of things. They control the short-term behavior of the markets. Well, Knight is the largest market making firm in the Country. And, true or not, they are also perceived as some of the biggest short sellers in the market. Why is this so significant? Market makers often trade for their own account and they can heavily impact the short-term movement of the markets. If you have access to level II, then you know KCG's market making symbol is "NITE". NITE on level II is often perceived as a bad guy, which I think is a bit of a myth. Maybe some truth to that thinking on certain occasions, but not always.

Knight Capital Group ( KCG ) announced on Thursday that it lost $440 million when it sold all the stocks it accidentally bought Wednesday morning because of a computer glitch. The losses are threatening the stability of the firm. In a statement, Knight Capital said its capital base, the money it uses to conduct its business, had been "severely impacted" by the event and that it was "actively pursuing its strategic and financing alternatives."

Supposedly, the problem on Wednesday led the firm's computers to rapidly buy and sell millions of shares in over a hundred stocks for about 45 minutes after the markets opened. Those trades pushed the value of many stocks up, and the company's losses appear to have occurred when it had to sell the overvalued shares back into the market at a lower price. The company said the problems happened because of new trading software that had been installed. Give me a break. Sorry, I don't buy that. Although computers are used to execute trades, humans are responsible for pulling the trigger. I seriously doubt when it's all said and done, there's not going to be more to this story than meets the eye.

Is KCG's lack of involvement in the markets right now cause for this market to move higher as a result of the Firm's lack of short participation in the markets? In my opinion, it's quite possible because many big firms on Wall Street have routed orders elsewhere since KCG's screw up. If their market makers don't have those huge accounts to play with, then they have no horse and no spear to joust.

It's definitely something to keep in mind as we assess the major indexes price action in the days and weeks ahead. However, the reason I bring up Knight today isn't so much because I wanted to share the story about what happened or even make reference to the possibility that their lack of participation has lifted the lid on selling pressure in the markets. The real reason is should you buy Knight at current levels for a potentially enormous return somewhere down the road?

KCG's debacle reminds me of those rare situations when the market and the media have an overly negative knee jerk reaction to an unexpected event with a particular stock. Whether it's an oil spill for a major oil player, spoiled food for a major multi-national fast food franchise or even a faulty plane or crash for one of the big airlines, we usually look back at the scenario and wished we would have bought the stock. KCG may well end up being one of those scenarios, although their capital crisis is a very big and bad deal.

I've included a monthly chart here of KCG to show you it's no coincidence the stock blew out its all-time low this week, but only by a short margin. The Company is actively seeking suitors to fix their massive capitalization issues in order to maintain operations, and they need to come up with a solution very quickly. Since banks are too big to fail, aren't market making firms as well? I'm being a bit sarcastic there, but quite honestly it wouldn't surprise me at all to see some overly creative solution take place that ends up saving KCG, thus making buyers of the stock today a lot of money down the road.