SALON

Friday, Aug 3, 2012 9:45 PM UTC

Knight gets a boost, helped by loyal clients

By

Topics: From the Wires,

After a grisly two days, Knight Capital got a few breaks. Relatively speaking, anyway.

The battered trading firm, whose software glitch briefly sent stock trading into chaos on Wednesday, reportedly got a new line of credit, which was crucial after the company drained its resources to pay for Wednesday’s debacle. The stock, which had shed three-quarters of its value over the previous two days, jumped 57 percent. And many of Knight’s clients, rather than heading for the door, instead closed ranks around the company.

Granted, those positive developments are just a small oasis in a desert of tense problems. Not all of Knight’s customers will be so easy to please. It almost certainly needs to come up with more funding sources, and could still end up being forced to sell itself to survive. The head of the Securities and Exchange Commission on Friday publicly called the incident “unacceptable.”

Knight Capital Group, based in Jersey City, N.J., is a trading firm that takes orders from big brokers like TD Ameritrade and E-Trade. It then routes them to the exchanges where stocks are traded, like the New York Stock Exchange.

The company has been taking a beating since Wednesday, when a problem with a newly installed piece of software wound up funneling erroneous orders for some 140 stocks to the market for the first 45 minutes of trading. That caused shares of some stocks to swing wildly.

Those 45 minutes have been devastating for Knight, which has scrambled to reassure clients and investors that it’s got things under control.

Knight said Thursday it would have to spend $440 million — nearly four times what it earned last year — cover the mistaken trades. That expense, it said, had “severely impacted” its capital base, and the company said it was looking at “strategic” alternatives, business-speak for saying it might sell itself. The Wall Street Journal reported Friday that Knight received a credit line from an unnamed party that would allow it to remain open for the day. Knight didn’t return a message seeking confirmation.

The stock, which had plunged from $10.33 to $2.58 over Wednesday and Thursday, is still far from being made whole. It shot up $1.47 to $4.05 Friday.

The client reaction so far has been more muted than outraged. Knight has said that none of its clients were hurt, and that the faulty software has been removed. Knight says it notified clients immediately after it noticed the problem, and had them stop routing trades through its systems on Wednesday.

E-Trade and Vanguard were still not trading through Knight by Friday, but said they’d continue to assess the situation. A spokesman for Vanguard, which works with Knight through its brokerage arm, called Knight “a longtime and valued partner.” TD Ameritrade, which on Thursday had been performing test runs before placing orders with Knight, announced that it would resume normal trading.

Joe Fox, CEO of the online brokerage Ditto Trade, said Knight had worked hard to try to smooth over the problems it had caused. His company had also halted its trading through Knight but planned to resume “once they straighten out their problems,” Fox said.

“There’s no such thing as perfect technology,” he added. “It’s all about how you mitigate the situation.”

Still, there’s no denying the trauma that Knight has caused, at least to itself. Said Fox: “I’m more concerned for them as a company.”

Knight’s blunder revives a thorny debate in the financial system about the merits of high-speed trading, where lightning-fast mathematical models trade stocks in milliseconds and, as recent mistakes indicates, strain the system that is supposed to handle them.

The foul-up was the latest in a string of high-profile technical problems that have left some investors convinced they can’t trust the financial markets. The biggest was the “flash crash” in May 2010, when a computer problem caused the Dow Jones industrial average to drop nearly 600 points in five minutes. The most recent was Facebook’s debut on the Nasdaq stock exchange in May, when technical problems at Nasdaq kept some investors from knowing if their trades had gone through.

It’s also a reminder of how quickly fortunes can change on Wall Street: After the Nasdaq flub, Knight was one of Nasdaq’s most outspoken critics.

Mary Schapiro, the SEC chairwoman, said in a statement that “Wednesday’s event was unacceptable.”

“Reliance on computers is a fact of life not only in markets everywhere, but in virtually every facet of business,” Schapiro said. “That doesn’t mean we should not endeavor to reduce the likelihood of technology errors and limit their impact when they occur.”

Duncan Niederauer, CEO of the New York Stock Exchange’s parent company, called Knight’s problem an “unfortunate situation” and praised Knight CEO Thomas Joyce for being upfront and accountable.

Knight’s glitch happened when it was installing software for a new trading program at the NYSE, but both Knight and the NYSE said the NYSE was not to blame.

Niederauer acknowledged that investors are losing confidence in the system and spoke of “the need for reforms in market structure in the United States.” But he also laid some of the blame on regulators.

“We have talked about this publicly that the growing fragmentation and uneven regulations across what is now hundreds of competing platforms continue to fuel a crisis of confidence among investors,” Neiderauer said. “It is just too hard for them to understand how the markets work.”

More Christina Rexrode.

Next Article

Related Stories

More Related Stories

Featured Slide Shows

The week in 10 pics

close X
  • Share on Twitter
  • Share on Facebook
  • Thumbnails
  • Fullscreen
  • 1 of 11
  • Lisa Montgomery embraces her nephew Thursday after a tornado tore apart her home in Cleburne, Texas. The twister killed six people and destroyed entire swaths of the North Texas town.
    Credit: AP/LM Otero

  • Jack McMahon, the defense attorney for abortion doctor Kermit Gosnell, speaks outside the Criminal Justice Center Philadelphia Tuesday. His client was convicted of killing three babies in his clinic, and will serve multiple life sentences.
    Credit: AP/Matt Rourke

  • A photo taken Monday captures Vice President Joe Biden's response to a Milwaukee second-grader's innovative proposal to end America's epidemic of gun violence. This guy!
    Credit: AP/Jenny Aicher

  • Sen. Rand Paul, R-Ky., flanked by a grouper-eyed Michele Bachmann, addresses the IRS' admission that it targeted Tea Party groups in advance of the 2012 election. In an op-ed for CNN Thursday, the Kentucky senator slammed the president for his faux outrage.
    Credit: AP/Molly Riley

  • Ousted IRS chief Steven Miller is sworn in on Capitol Hill Friday. Miller testified before the House Ways and Means Committee on the extra scrutiny the agency gave conservative groups applying for tax-exempt status.
    Credit: AP/J. Scott Applewhite

  • Attorney General Eric Holder pauses as he testifies on Capitol Hill before the House Judiciary Committee Wednesday. Holder is under fire, among other things, for the Justice Department's gathering of phone records at the Associated Press.
    Credit: AP/Carolyn Kaster

  • O.J. Simpson sits during an evidentiary hearing at Clark County District Court in Las Vegas, Nev., Thursday. Simpson, who is currently serving a nine-to-33-year sentence in state prison for armed robbery and kidnapping, is using a writ of habeas corpus to seek a new trial.
    Credit: AP/Las Vegas Review-Journal/Jeff Scheid

  • Major Tom to ground control: On Sunday astronaut Chris Hadfield recorded the first music video from space, a cover of David Bowie's "Space Oddity."
    Credit: AP/NASA/Chris Hadfield

  • When it rains it pours. President Barack Obama speaks during a news conference Thursday with Turkish Prime Minister Recep Tayyip Erdogan, inexplicably inspiring an #umbrellagate Twitter meme.
    Credit: AP/Jacquelyn Martin

  • A smoke plume rises high above a road block at the intersection of County A and Ross Road east of Solon Springs, Wis., Tuesday. No injuries were reported, but the the wildfire caused evacuations across northwestern Wisconsin.
    Credit: AP/The Duluth News-Tribune/Clint Austin

  • Recent Slide Shows

  • Share on Twitter
  • Share on Facebook
  • Thumbnails
  • Fullscreen
  • 1 of 11

Related Videos

Comments

 0 Comments

Comment Preview

Your name will appear as username

You may use these HTML tags and attributes: <a href=""> <b> <em> <strong> <i> <blockquote>

follow salon

Most Read

Popular on Reddit

links from salon.com

vote
New Yorker launches tool by Aaron Swartz to protect leaks: Strongbox, co-created by the late technologist, is an open-source drop box for leaked documents
206 points207 points | 7 comments
vote
New Yorker launches tool by Aaron Swartz to protect leaks: Strongbox, co-created by the persecuted late technologist, is an open-source drop box for leaked documents
154 points155 points | comment
vote
Loaded terminology like "entitlements" and "welfare" skews the debate and alters America. How right-wingers use semantic tricks to kill government.
90 points91 points | 28 comments
vote
Obstruction will ruin the GOP: Playing politics and abusing the system can excite the extremes, but it's a recipe for long-term political disaster
46 points47 points | 8 comments
vote
With the help of Photoshop, artist Yao Lu has made shanshui — traditional ink paintings — of China's landfills
25 points26 points | comment

From Around the Web

Presented by Scribol
listener_new_rect The Listener: So long, Sookie Stackhouse

Recommendations