A software error and a half hour of erroneous trading will cost one of the largest trading firms in America more than $400 million dollars, and may even be a death blow to a 20-year-old firm. The computing error led to mistaken trades and price fluctuations on the New York Stock Exchange (NYSE).
Securities and Exchange Commission Chairman Mary Schapiro called the technical difficulties “unacceptable”.
“In addition, existing rules make it clear that when broker-dealers with access to our markets use computers to trade, trade fast, or trade frequently, they must check those systems to ensure they are operating properly,” she was quoted as saying on CBS News.
Knight Capital Group is a “global financial services firm that provides access to the capital markets across multiple asset classes. The organization works with a broad network of clients, including broker-dealers, institutions and corporations”. Knight takes orders from brokers and then routes them to the necessary exchanges where the shares are sold. At its height, 15-20 percent of all trades on the NYSE and NASDAQ were processed through Knight Capital computers.
The August 1 error was caused by a botched software upgrade that Knight implemented earlier in the week. The upgrade was to assist in utilizing the NYSE’s new trading platform. Nearly 150 stocks were affected when the software glitch caused the stocks to be flooded with buy and sell orders. The NYSE is currently investigating the fluctuations.
In an article by the Associated Press, the following examples were given: “Wizzard Software shot above $14 after closing the night before at $3.50. Abercrombie & Fitch jumped 9 percent within minutes, hitting $36.75 after closing the night before at $33.80. Harley-Davidson suddenly fell 12 percent, to $37.84 from $43.23.”
“This issue was related to Knight’s installation of trading software and resulted in Knight sending numerous erroneous orders in NYSE-listed securities into the market,” said the company is a press statement. “This software has been removed from the company’s systems.”
The erroneous trading will be a costly mistake for Knight. Knight estimated its pre-tax loss would be approximately $440 million. The company has since been scrambling to get the capital it needs to cover its losses and continue to make large-volume trades in the global market. Earlier in the week, the firm had to turn away potential trades because it didn’t have the capital to back up the offers. The company has until Monday to find a long-term solution or, according to the Wall Street Journal, the company could face sale, a breakup of the company or bankruptcy filings.
Knight’s press release confirms that “the company is actively pursuing its strategic and financing alternatives to strengthen its capital base.”
Knight has seen its own holdings take a significant hit. In two days, the company’s stock plunged 75 percent. The glitch and subsequent money troubles have led some financial institutions, such as TD Ameritrade, to stop trading through Knight.
The incident, and similar ones in the past, has caused some investment bankers to rethink there systems.
“We want to make sure that what happened to Knight doesn’t happen to us,” said the head of one investment bank in an interview with the Chicago Tribune. He said his company was looking carefully at how it tests new trading systems. The efforts also include better educating traders, to make sure traders know when new systems are being implemented and can be wary of unusual activity on launch dates.