Knight Capital Loses $440 Million in Minutes

by Tom Carlson | Friday, Aug 3, 2012 | 701 views

On Wednesday, Knight Capital Group, Inc. (NYSE:KCG) lost a reported $440 million (pre-tax) in the opening minutes of trading due to problems with new trading software that the company had apparently rushed into service. To put this amount into perspective, it was well over twice the company’s 2011 pre-tax net income of $187 million.


Knight “is a global financial services firm that provides access to the capital markets across multiple asset classes to a broad network of clients, including broker-dealers, institutions and corporations.” It is one of the leading market makers on both the NYSE and NASDAQ and is important to smooth, orderly trading operations in those markets.


The new trading software was launched on Wednesday in a competitive effort by Knight to be among the first firms to be able to offer customers the ability to participate in a new New York Stock Exchange program. The new NYSE program is designed to give retail investors better and more equitable access to NYSE trading.


Unfortunately, this high-speed, algorithmically driven trading system had been rushed into service too soon and created erroneous orders in some 140 stocks. The effect was significant enough to be noticed almost immediately by traders and NYSE officials, and various securities regulators were notified. In the reported 45 minutes it took to identify Knight as the source and shut down the Company’s trading, the above-noted $440 million in losses had already been incurred.


In a Thursday press release the company acknowledged that its capital base had been “severely impacted”, but also reported that all of its broker/dealer subsidiaries were in compliance with their net capital requirements. The company also said that it had wound down all erroneous trade positions, resumed its trading and market making activities, and was “actively pursuing its strategic and financing alternatives to strengthen its capital base.”


This event had very little impact on the overall market. But it has, especially following other debacles involving high-speed, automatic trading and just the sheer complexity of present-day markets, has resulted in calls for investigations and reforms. It’s likely we’ll hear the name Knight Capital Group again in the future by those pushing for change.

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