Will Knight Capital survive? And what about Hotspot FX?

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Will one of Hotspot FX's Forex ECN rivals pick it up?

HotspotFX logoAfter what the Wall Street Journal termed a "Knightmare" on Wall Street, market maker Knight Capital is desperately looking for outside financing to bolster its equity position after reporting $440 million of losses due to trading errors made yesterday. At the time of writing Knight Capital Group shares (NYSE:KCG) are down more than 50% today.

As far as the FX world is concerned, while Knight Capital's business is mostly U.S. equities-related, the company also owns Hotspot FX, one of the leading Forex ECNs doing about $30 billion per day in FX volumes. Knight acquired Hotspot FX for $77 million in 2006.

Part of the problem Knight is facing is a crisis of confidence -- in its ability to properly execute trades, as well as in its ability to survive. And that crisis is likely to spill over to all operating subsidiaries of Knight, including  Hotspot FX. One solution is to do a quick sale of Hotspot FX, which is not really essential to Knight's main equities business, to raise cash quickly for Knight and to prevent Hotspot FX clients from leaving. With Thomson Reuters having recently paid $625 million to buy Hotspot FX rival FXall, we believe that others in the sector sch as ICAP-EBS and State Street's Currenex, might take a close look at further consolidating the sector by picking up Hotspot FX.

Stay tuned, should be an interesting few days...

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  • LiteSites Friday, 03 August 2012

    Hotspot FX is not a credit exposure counterparty to traders on its ECN

    From inception Hotspot FX's institutional ECN was set up so that trading counterparties have credit only to one another and none to Hotspot FX. This was done through the ECN's prime broker credit structure, which Hotspot FX developed a decade ago to enable the world's largest buy-side clients and banks to trade and clear yards of volume on the ECN when Hotspot was an early-stage VC-backed company with a few million dollars in working capital. Participants may want to back away from trading on Hotspot FX during this unsettled time, but from credit standpoint it is a meaningless precaution.

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