Knight Capital (KCG) Fighting for Survival

Shares of Knight Capital (KCG), the biggest market maker for ETFs, fell for a second session on Thursday after the firm disclosed a stunning $440 million loss — more than 30% of its revenue for 2011 — caused in just 45 minutes from a computer-trading glitch.

Knight said Thursday an out-of-control trading algorithm caused the Jersey City, N.J.-based trading house to enter millions of faulty trades in less than an hour on Wednesday morning, resulting in Knight sending numerous erroneous trading orders in NYSE-listed securities into the market. The company said it has traded out of its entire erroneous trade position, which resulted in a realized pre-tax loss of $440 million.

Needless to say, the size and speed of the losses has been particularly unnerving for investors and markets. Knight shares lost more than 62% of their value on Thursday to close at $2.58. They had fallen nearly 33% the previous day, causing the company’s market cap to nosedive in after-hours trading to $231 million from $1.01 billion.

While Knight Capital has yet to comment on the status of the talks, the brokerage firm is under pressure to strike a rescue deal within days, sources told Bloomberg News. Bberg, citing unnamed sources, reported that Knight is working with Goldman Sachs (GS) and Sandler O’Neill & Partners LP about a potential sale or capital infusion. Bloomberg also said Knight Capital opened its books to potential buyers, including private-equity firms and at least one securities- industry rival.

“If they don’t get an investor within the next 48 to 72 hours, I think Knight’s going to have trouble surviving,” David Simon, chief executive of hedge fund Twin Capital Management LLC told The Wall Street Journal.

Another sign of mounting pressure, notes The Journal, is  the fact that some major customers such as fund giants Vanguard and Fidelity Investments said they had stopped doing business with Knight.

Knight’s $440 million loss exceeded the co.’s $365 million cash on hand at the end of the second quarter. According to a latest report on Fox Business Network, Knight has approached JPMorgan (JPM) for financing, raising the likelihood the firm will be sold or face bankruptcy.

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