Knight Capital fiasco underlines need for greater safeguards
As the SEC examines Knight Capital Group’s devastating trading glitch, firms would do well to implement proper risk management measures to reduce the chance of technology errors. August 07, 2012 | Magessan RajFollowing a grisly few days which saw Knight Capital Group (KCG) hang on for dear life after it lost $440 million due to a computer trading glitch on August 1st 2012, the firm finally secured a much-needed financial injection to help it avoid a sale, breakup or bankruptcy, as private equity firms General Atlantic and Blackstone, together with brokerages TD Ameritrade and Stifel Nicolaus pledged to invest $400 million in the beleaguered firm, allowing it to continue operations on Monday. While the financing deal was signed just in time to avert a potentially shocking failure of one of Wall Street biggest powerhouses, how did the 17-year-old firm come within a whisker of bankruptcy in a matter of days? One of the leading market makers in US stocks, KCG is a trading firm that takes orders from big traders and then routes them to the exchanges where stocks are traded, handling some $20 billion of shares a day through the New York Stock Exchange (NYSE) and accounting for 11% of all stock trading in the country. In an aggressive move, the firm tweaked its computer coding to push itself onto a new trading platform to coincide with NYSE’s introduction of a program (August 1st 2012) intended to loosen brokerage firms’ control over retail investors, shifting investors’ trades to a special platform where trading houses then competed to offer them the best price. However, instead of directing the firm’s computers to react to trading, an error in the coding caused the system to place erroneous orders for some 140 stocks for the first 45 minutes of trading, causing shares of some stocks to fluctuate wildly and ultimately leaving KCG with a devastating $440 million loss. While the exact nature of the software glitch remain unclear, it brings to mind the 2010 “flash crash”, in which nearly $1 trillion in market value evaporated in a matter of minutes. Explaining the foul-up, KCG released a statement saying, “Knight experienced a technology issu... Please login to read the complete article. If you already have an account, you can login now or subscribe/register.
Categories: Exchanges, Markets & ExchangesExchanges,Markets Exchanges, Exchanges,Markets & Exchanges, Keywords:Knight Capital, NYSE, General Atlantic, Blackstone, TD Ameritrade, Stifel Nicolaus, Fidelity, Vanguard, Barclays, Roger Freeman, SEC, Mary Schapiro Knight Capital, NYSE, General Atlantic, Blackstone, TD Ameritrade, Stifel Nicolaus, Fidelity, Vanguard, Barclays, Roger Freeman, SEC, Mary Schapiro
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