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Knight Lives! (At Least Until Monday): Financial Winner

NEW YORK ( TheStreet) -- Knight Capital Group (KCG - Get Report) was the big winner on a strong Friday for financials, bouncing back from two days of brutal losses, with shares rising 57% to close at $4.05

After seeing its shares drop 33% on Wednesday after an early trading glitch, followed by a 63% plunge on Thursday, after announcing a pretax loss of $440 million from its efforts close-out its erroneous trades, Knight Capital's shares recovered some of the losses after the company told its clients early Friday that it had secured sufficient credit to allow it to operate for another day, as it continued to pursue a capital infusion or outright sale.

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 also included bank subsidiaries of Bank of America (BAC), Bank of Montreal (BMO), and JPMorgan Chase (JPM).

Among the covenants of the credit agreement was a requirement that Knight maintain certain levels of capital for its broker-dealer subsidiaries, which the company might be unable to meet, following the three-day settlement of its erroneous trades, without securing additional capital from outside.

KBW analyst Niamh Alexander says that "it's possible that they could be in breach," of the $200 million credit facility's covenants, "but they may not have actually drawn down those facilities."

Alexander calls the new credit line reported by the Journal "very encouraging," but says the company still needs "to do something and do it very quickly. It will be difficult for customers to continue to route [trades through Knight] unless they are more comfortable about the capital situation."

"It is going to be day by day... something needs to happen for people to feel better about the capital," she says.

CRT Capital Group analyst Kevin Starke said on Friday that Knight Capital's trading loss is likely to be recognized on Monday, and that "solving the liquidity problem and capital shortfall that this will cause thus needs to be completed by Monday." Starke also said that "FINRA is on site and stated publicly Thursday that the Company was in compliance with capital requirements, but we wonder aloud whether that is simply because the bad trades have yet to settle."
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