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Knight Capital Rescuers Let Scottrade In On Deal

The firms that rescued Knight Capital after its near-fatal software glitch earlier this month have sold some of their preferred stock in the firm to Scottrade.

The financial services firms that rescued Knight Capital Group after its near-fatal software glitch earlier this month have sold some of their preferred stock in the firm to retail online broker Scottrade, according to three people familiar with the transactions.

Knight encouraged the six firms that infused $400 million into the company on Aug. 6 to sell some of their stake to Scottrade Inc, a unit of Scottrade Financial Services Inc , according to the sources, who asked not to be named because they signed confidentiality agreements.

Knight is one of the two biggest executors of stock trades in the United States, and Scottrade is one of its biggest customers.

Private equity giant Blackstone Group LP and high-speed market-maker Getco, have sold some of their securities, according to regulatory filings on Knight's website.

At least one other firm also is expected to make a regulatory filing about its sale imminently, said one of the sources, and the other three are expected to follow suit.

Scottrade has indicated it will be a long-term investor, said one person familiar with the transactions.

A spokeswoman for Scottrade did not immediately return a call for a comment. The Scottrade purchase was reported earlier by Fox Business Network.

Discount brokers including TD Ameritrade Holding Corp -- which was part of the rescue team -- are among Knight's largest clients.

Blackstone, Getco, TD Ameritrade, New York-based investment bank Jefferies Group, St. Louis-based brokerage firm Stifel Nicolaus and Arkansas-based broker Stephens Inc cumulatively bought preferred shares at $1.50 a share that are convertible into about 267 million common shares, or 73 percent of Knight.

The securities pay a dividend of 2 percent, and convert if the stock closes at $3 or higher for a fixed period of time.

Spokeswomen for Knight and for Getco declined to comment on any sales. Blackstone was not immediately available for comment.

Knight's crisis occurred on Aug. 1, when a software glitch flooded the New York Stock Exchange with unintended orders for dozens of stocks. The error cost Knight, which sold most of its unwanted shares at a discount to Goldman Sachs Group, more than $400 million in losses.

Shares of Knight closed down 1.8 percent at $2.77 on Wednesday.

Copyright 2010 by Reuters. All rights reserved.

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