By Matt Jarzemsky
Blackstone Group LP (BX) and several other companies have
replaced Knight Capital Group Inc. (KCG) as the designated market
maker for certain securities on the New York Stock Exchange,
because of potential conflicts of interest arising from the trading
firm taking on new backers.
The NYSE ordered that some securities be reassigned to other
market-making firms because Knight's new investors--a consortium
including Jefferies Group Inc. (JEF), Blackstone and trading firm
Getco LLC--had common ownership or business relationships with some
of the issuers of those securities, according to a person familiar
with the move by the exchange. Designated market makers--formerly
known as specialists--act as intermediaries among brokers looking
to buy and sell shares and have obligations to maintain orderly
markets and facilitate pricing in their assigned securities.
The exchange's rules give it broad authority to ask for the
reassignment of securities that are perceived to present potential
conflicts, such as firms having ownership stakes in their
designated market maker, the person familiar with the matter
said.
Such potential conflicts put a small dent in Knight's business
acting as the designated market maker for companies that trade on
the Big Board. They come in the wake of six firms investing in
Knight earlier this month, which helped the brokerage stay afloat
after a software glitch triggered $440 million in trading
losses.
Potential conflicts resulted in Blackstone replacing Knight as
the designated market maker for two closed-end funds it sponsors,
according to a person familiar with the company's switch. DDR Corp.
(DDR), a real-estate investment trust, moved away from Knight as
the market maker for its stock and several issues of preferred
shares because a venture between DDR and Blackstone bought 46
shopping centers for $1.4 billion in June, according to people
familiar with the matter.
Technology outsourcer Genpact Ltd. (G) replaced Knight with a
Goldman Sachs Group Inc. (GS) market-making unit because both
Genpact and Getco, which was part of the group investing in Knight,
share the private-equity firm General Atlantic as an investor.
"When Knight basically was bailed out by the consortium, we
looked at it as, 'Oh, they're on firm footing'," a Genpact
spokeswoman said. "In this case, it wasn't our choice, it wasn't
Knight's choice. It's just a stock-exchange rule."
The trading firm has lost such assignments for at least seven
stocks, preferred stocks or closed-end funds this month, according
to NYSE records. It is unclear whether more will follow.
"These are very small listings--it's not as if they lost IBM or
they lost Exxon," said James Angel, visiting associate professor at
the University of Pennsylvania's Wharton School of Business. "Sure,
you'd hate to lose anybody, but these are all perfectly
understandable reasons which really don't have anything to do with
their underlying capacity as a DMM [designated market maker]."
Knight Capital doesn't serve as the designated market maker for
International Business Machines Corp. (IBM) or Exxon Mobil Corp.
(XOM). Well-known stocks it covers include the U.S.-listed shares
of Sony Corp. (SNE, 6758.TO).
Fewer than 750,000 shares of Genpact traded hands over the past
30 days, according to FactSet. That makes the stock less attractive
to a market maker than the shares of, for example, Bank of America
Corp. (BAC), which saw more than 150 times as many trades. Market
makers earn fractional sums many times over by providing liquidity
to potential buyers of a stock. The more the stock is traded, the
more they stand to earn.
Knight is the designated market maker for more than 600
securities on the NYSE and NYSE MKT, another stock exchange run by
parent company NYSE Euronext (NYX), according to a recent statement
by the exchange. Knight and electronic-trading rivals Getco and
Virtu Financial have gotten into designated market making in recent
years even as the number of floor-trading firms at the exchange has
shrunk.
A Blackstone spokesman declined to comment on the move. A DDR
spokesman didn't return calls for comment. A spokeswoman for Knight
declined to comment.
Write to Matt Jarzemsky at matthew.jarzemsky@dowjones.com.
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