Knight said to have spurned Citadel loan

Knight Capital Group rejected a last-minute, $500 million rescue-loan offer from Citadel on Sunday as it worked on a competing plan from a group of investors, said two people with knowledge of the matter.

The loan terms would have given Citadel a minority stake in Knight Capital’s stock and an interest in the market maker’s Hotspot foreign-exchange subsidiary, said the people, who spoke on condition of anonymity because the talks were private. Citadel, the $12.5 billion hedge fund run by billionaire Ken Griffin, competes with Knight’s market-making and electronic-trading business.

Citadel, which had walked away from a previous round of talks on Aug. 4, made the offer as Knight Capital was completing a $400 million capital infusion from a group of investors including Jefferies Group and Blackstone. That transaction, which was completed Monday, gives the new investors rights to take a more than 70% stake in Knight.

“Knight explored a wide range of alternatives,” Kara Fitzsimmons, a spokeswoman for Knight Capital, said in an e-mailed statement. “After a thorough review, Knight determined that the $400 million equity investment was the best and only alternative for the company and its shareholders.”

Katie Spring, a Citadel spokeswoman, declined to comment.

Knight sought the lifeline after a programming malfunction spewed orders through exchanges Aug. 1 and saddled the company with a $440 million trading loss.