Knight Capital’s (NYSE: KCG) is a 17-year old Jersey-city firm that executes high-frequency trades on behalf of retail brokers (like ETrade). It suffered massive trading losses because of a technology glitch on August 1, 2012. A $5 billion trade that was supposed to take place over 5 weeks was done in 20 minutes. Meaning, it was making trades of about $10 million in a minute. This expensive mistake affected shares from many other companies too, like Ford Motors and American Airlines to name a few.
The problem was with a new trading program, which was supposed to give Knight an advantage over its competitors. This incident highlights the effect that computerized trading has on organizations. Thomas Joyce, the CEO, has used his long-standing reputation in Wall Street to offer his word that this failure to detect such severe software problems will not occur again. For long, he has been among the strongest supporters of electronic trading and all it stood for.
As Knight trading looks to resume trading on the NYSE and NESE-designated markets tomorrow (August 13, 2012), it would help to take a look at their turn of fortune.
1995 – Knight Capital Group was founded
1998 – Knight Capital Group went public
2012 – 8/1/2012 – Technical error at Knight Capital Group rolls prices of 140 stocks on the New York Stock Exchange
- 9.30 AM – Trading bell, Knight queues up a huge volume of orders
- 9.40 AM – NYSE identifies Knight as the source of an unnatural spike in trade
- 10.00 AM – Knight identifies the root of the problem
- 10.15 AM – Orders that Knight sent are completed
End loss: $440 million
However, this glitch may also present an opportunity for canny investors. Though Knight’s shares have fallen to $2.90 from $13, analysts estimate that it will earn 40 cents a share in 2013 (source: investmentnews.com). There is the possibility that Knight will come riding through, but the issue is will they have enough confidence from the market to make a recovery from it. Let us hope that this Knight does not die by the sword.