Knight Capital Group's Ironic Imaginary Valuation

At $3.07 a share, after its 24% drop Monday, Knight Capital Group (NYSE: KCG) looks to be priced exactly right. That’s because, while it secured funding to stay afloat, it did so at great cost to legacy shareholders while admittedly saving what they had left. So I find it ironic that some are seeing KCG worthy of a higher value now. To me, that is amusingly anomalous to the mathematic malfunction that nearly erased the company.

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Knight Capital Group

Knight Capital Group (KCG) secured a lifeline of $400 million in equity financing from a consortium of investors including Jefferies (NYSE: JEF), Blackstone (NYSE: BX), GETCO LLC, Stephens, Stifel Financial (NYSE: SF) and TD Ameritrade (Nasdaq: AMTD). In doing so, the company stayed afloat, yes, but it gave up 70% of equity, the equity of legacy shareholders.

Some are talking today about the franchise value of Knight, the potential gain for the new shareholders, and the ongoing opportunity for all parties moving forward. While it’s true the company avoided bankruptcy, the odds of it rising from here back to $10, representing a 233% gain, are equal to the odds that the company sported in July to rise from its price then of $10 to $33. In other words, the only thing that was saved was the $3 per share investors have left and the jobs of the executives and the employees of Knight. The potential of the company is probably unchanged despite whatever creative capital minds might construct to sooth the wound. What was lost, and it was lost, was $7 per share or 70% of capital for each legacy shareholder of Knight who not long ago saw quotes of $10 a share for their stock.

The stock is priced right according to the efficient market (in theory), but I would say from here there is more likelihood of downside, given the potential for shareholder lawsuits and regulatory penalty. Given the broad reaching impact of mankind’s colossal failures in finance, more recently made famous by algorithmic trading and also the mortgage security malfunction at the hands of Wall Street and the rating agencies, these latest algorithmic errors are likely to bring down the hammer of Capitol Hill once again. So, I would avoid Knight’s shares rather than imagine value where it is not.

Article should also interest Goldman Sachs (NYSE: GS), J.P. Morgan (NYSE: JPM), Citigroup (NYSE: C), Morgan Stanley (NYSE: MS), McGraw-Hill (NYSE: MHP) and Moody's (NYSE: MCO) investors. Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.