Knight swings wildly, extends slide after 'glitch'; Gilead adds on rival's suspended trial

By Rebecca Melvin

New York, Aug. 2 - Knight Capital Group Inc. swung wildly but ultimately extended a free fall Thursday as the Jersey City, N.J.-based electronic trading firm dealt with fallout from the technology issues that caused its system to run amok and roil New York stock trading on Wednesday.

The swamped company said early Thursday that it is actively pursuing strategic and financing alternatives to strengthen its capital base after the mayhem caused a destabilizing $440 million loss.

"They traded into the 40s first thing, then rallied as distressed buyers came into the market," an East Coast-based portfolio manager said of the Knight Capital convertibles.

The paper moved all the way back up to 75 or 76. But then after the market close negative headlines shot the convertibles back down to 67, sources said.

"Things are definitely fluid!" the portfolio manager said.

Gilead Sciences Inc. was boosted by the misfortune of competitor Bristol-Myers Squibb, which suspended a mid-stage study of a potential hepatitis C treatment after at least one patient suffered heart failure. Gilead has been developing a rival treatment, which it acquired in its takeover of Pharmasset Inc.

Gilead and Knight Capital trading accounted for a large chunk of the day's convertibles volume, a New York-based trader said. Knight alone was said to have had $300 million of its convertibles change hands.

Meanwhile, Navistar International Corp.'s convertibles came in about 0.5 point amid word that Moody's Investors Service lowered its ratings on the company, citing challenges the company faces during the next 18 months in light of failing to achieve EPA certification of its EGR emissions technology.

In addition, several energy names were getting hit after weak earnings. They included Hornbeck Offshore Services Inc., Stone Energy Corp. and Canada's Petrominerales Ltd.

Stocks were down and U.S. Treasuries were up after market players were disappointed by the lack of definite action by the European Central Bank to shore up financially stressed euro-zone economies subsequent to its policy meeting Thursday.

Instead, ECB president Mario Draghi said that the bank may soon undertake open market operations and consider other unconventional measures to lower borrowing costs for various governments.

He went on to say that a plan on its policy response would be chiseled out in the coming weeks.

Markets anticipated more definite action after Draghi's comments last week that the bank would do whatever it takes to save the euro.

Draghi also called on euro-zone politicians to activate the region's bailout funds, the European Financial Stability Facility and the European Stability mechanism, to buy sovereign bonds when markets are exceptionally stressed, but he said support should be tied to strict conditions.

Knight Capital extends slide

Knight Capital's 3.5% convertibles due 2015, of which $375 million were priced in March 2010, traded down to as low as 40 early Thursday and then rallied back as distressed buyers came into the market, with the paper retracing losses up to 75 and 76.

The Knight Capital convertibles then closed at 74 bid, 75 offered; but negative headlines subsequent to the close shot that paper back down to trade at 67, a Connecticut-based trader said.

On Wednesday the bonds fell more than 10 points outright and were said to have contracted on a hedged basis by 5 or 6 points.

On Wednesday, they fell to 82.5 bid, 84 offered from about 92.5 previously.

Knight Capital shares spiraled lower by $4.58, or 63%, to $2.58, on top of a 33% slide on Wednesday.

"This is not like an earnings miss," a New York-based convertibles analyst said. "No one really knows what is going on, and we've seen this story from 2007 onwards. It's a question of confidence."

The analyst went on to say that the paper retraced losses intraday because of talk of a potential acquirer and a change-of-control put in the convertible indenture kicking in.

"There was hope that someone takes them over," the analyst said.

He said that truthfully the name is not even really on his radar screen because it is such a "hairy story" and his firm is not taking a strong opinion on it.

A trading source said, "There is a chance of a control put like all converts. I guess people can hope."

But "scary headlines" after the close were dousing those hopes.

Not only was the company considering bankruptcy after some failed talks with potential financial backers, but at least 10 counterparties are not dealing with Knight at least for now, according to Fox Business's Charles Gasparino, citing sources.

And despite those earlier reports, Gasparino reported around the market close that the company is considering a bankruptcy filing, which sent the convertibles back into another tailspin, a Connecticut-based trader said.

Prices of between 140 and 150 stocks fluctuated widely during the first 45 minutes of trading Wednesday, after a Knight Capital software system went haywire. The problem was related to Knight's installation of trading software and resulted in Knight sending numerous erroneous orders in NYSE-listed securities into the market, the company said in a news release early Thursday.

Knight said that it had traded out of its entire erroneous trade position, which resulted in a pre-tax loss of about $440 million.

Gilead adds

Gilead's 1% convertibles due 2014, or the C convertibles, traded up to 134 during Thursday's session from 128, which was up about 6 points outright on the day.

Gilead's 0.625% convertibles due 2013, or the B convertibles, traded up 9.5 points outright to 153.4, according to Trace data.

The Gilead 1.625% convertibles due 2016, or the D convertibles, moved up 5.5 points to 141.25.

Shares of the Foster City, Calif.-based biopharmaceutical company ended up $3.66, or 7%, at $57.29.

The large, liquid Gilead convertibles are often traded in large volume by the bigger banks in contrast to the smaller broker/dealers, which do not see much trading of these issues.

Gilead "is too efficient" and not the kind of name that smaller players can compete in, a New York-based trader said.

Sparking even more trading action than normal on Thursday was news that rival Bristol-Myers has suspended a phase 2 trial of its nucleotide-based drug to treat hepatitis C after a patient suffered heart failure.

Bristol-Myers paid $2.5 billion for the experimental drug, a relatively inexpensive price tag compared to Gilead's $11 billion investment in its nucleotide-based hepatitis C drug.

Shares of New York-based Bristol-Myers fell 7% amid at least one analyst calling for investors to assume that the drug is dead.

Another convertible issuer with a foot in the hepatitis C treatment arena is Vertex Pharmaceuticals Inc. The Vertex convertible has been active of late, trading at 122 to 122.16 versus an underlying share price of $49.87 early in the week, according to a New York-based trader.

Mentioned in this article:

Gilead Sciences Inc. Nasdaq: GILD

Hornbeck Offshore Services Inc. NYSE: HOS

Knight Capital Group Inc. NYSE: KCG

Navistar International Corp. NYSE: NAV

Petrominerales Ltd. Toronto: PMG

Stone Energy Corp. NYSE: SGY

Vertex Pharmaceuticals Inc. Nasdaq: VRTX

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