Streams

Cost of Glitch for Knight Capital: $440M

Thursday, August 02, 2012

Wednesday’s computer glitch is turning out to be a costly one. The technical problem that led to wild price swings for nearly 150 stocks on the New York Stock Exchange will cost Knight Capital Group $440 million.

Knight's stock plunged for a second day, erasing 70 percent of its value from two days ago. The company also said it is pursuing ways to raise money to fund the expense, raising questions about the firm's viability.

Knight's embattled CEO Thomas Joyce appeared publicly for the first time Thursday to defend his firm in the aftermath of the trading disaster.

"You cannot keep people from doing stupid things," Joyce said in an interview on Bloomberg Television. "That is what happens when you have a culture of risk."

But some see it less as a culture of risk and more the nature of high speed trading.

“This stock market is you know to a large degree a real wild west, people are operating on their own, regulators don’t have a great window into what’s happening on the sort of nanosecond level where the market’s really operating,” Nathaniel Popper, a reporter for The New York Times, explained.

 For more on this story, listen to Soterios Johnson's interview with Nathaniel Popper of the New York Times.

Knight, which is a brokerage firm based across the Hudson River in Jersey City, NJ, is a so called “market maker,” a Wall Street middle-man. It uses computers to make high speed trades and new software apparently led to the stock price snafus which sent erroneous orders.

In the two days since the glitch occurred, Knight's stock has fallen to $3.14 from $10.33 on Tuesday. Knight takes orders from brokers like ETrade and TD Ameritrade and routes them to the exchanges where shares are traded.

For investors, it was the latest breakdown in the increasingly complicated electronic systems that run stock trading. Those systems have been showing signs of strain as more traders and big investment firms use powerful computers to carry out trades in mere fractions of a second.

 These trading issues have become so problematic and frequent that many experts believe they have shaken investors' faith in markets, especially after the deep losses they suffered during the financial crisis and the recession that followed. As a result, many small investors have been fleeing the stock market.

"It's speaking to the lack of trust that retail investors have with Wall Street," Dave Abate, senior wealth adviser at Strategic Wealth Partners in Seven Hills, Ohio, said. "Firms are getting punished whenever there is any hint of an error or a situation where the little guy is possibly being taken advantage of. I think there's just zero tolerance for that."

The latest disruption came in May, when technical problems on the Nasdaq stock market marred Facebook's debut as a public company, preventing some investors from knowing if they'd bought shares or being able to sell them.

The most visible and chaotic malfunctions occurred in May 2010, when the Dow Jones industrial average dropped nearly 600 points in five minutes, an event that was dubbed the "flash crash." The problem at that time was also traced to technical glitches.

In the 26 months since the flash crash, there have been inflows of money from retail investors in only six months. The total net outflow of money over that period from stock funds was $172 billion, according to fund consultant Strategic Insight.

This glitch is an ironic embarrassment for Knight's CEO Joyce, who publicly criticized Nasdaq for the problems with Facebook's initial public offering.

Guests:

Nathaniel Popper

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