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Knight Needs More Than Loan Armor (Update 2)

Updated with comments from Fitch Ratings, CRT Capital Group analyst Keven Starke, and market close informatoin.

NEW YORK ( TheStreet) -- Knight Capital Group (KCG - Get Report) bounced back in a big way on Friday, following a report that the firm had obtained a credit line allowing it to operate for another day.

The shares shot up 57% to close at $4.05, amid a very strong market rally on surprisingly strong job growth numbers, after the Wall Street Journal reported that Knight Capital had told its clients that the company had obtained a new credit line, allowing it to continue processing trades for its customers for another day.

Shares of the Jersey City, N.J., market maker and facilitator of electronic transactions for wholesale trading clients announced dropped 63% on Thursday, after Knight Capital announced a pretax loss of $440 million, after glitches in its trading software on Wednesday "sent into the market a ton of orders, all erroneous, so we ended up with a large error position which we had to sort through the balance of the day," according to Knight Capital CEO Thomas Joyce, who was interviewed on Bloomberg TV.

Knight Capital announced early Thursday that it was "actively pursuing its strategic and financing alternatives to strengthen its capital base."

KBW analyst Niamh Alexander had said on Thursday that "the Board needs to sell this company ASAP in our opinion if it can't get private financing to shore up capital," because "continuing independently will be challenging without more capital."

Potential acquirers for Knight Capital, according to Alexander, include Goldman Sachs (GS), Credit Suisse (CS), and Cantor Fitzgerald, all of which "recently expressed interest to expand into wholesaling organically." The analyst said that KBW would potentially consider JPMorgan Chase (JPM - Get Report), Interactive Brokers Group (IBKR), or Jefferies (JEF), to be buyers "as they would likely be interested in the trading technology and the retail wholesale network while also potentially eliminating a competitor in the trade execution institutional business."

While investors were clearly breathing a sigh of relief -- pushing Knight Capital's shares well above the takeout value of $3.40 estimated by Stifel Nicolaus analyst Matthew Heinz on Thursday -- other Wall Street firms were shying away, with the Journal reporting that TD Ameritrade (AMTD) and E*Trade (ETFCO) we not routing trade orders through Knight Capital.

Knight Capital in June renewed a $200 million credit line with a group of banks led by U.S. Bancorp (USB) subsidiary U.S. Bank, NA, that included bank subsidiaries of Bank of America (BAC), Bank of Montreal (BMO), and JPMorgan Chase (JPM - Get Report).
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