45 Minutes of Software Glitch: Knights Capital Group Loses $440 Million

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Just in two days, the shares of Knights Capital Group plunged by 80 percent as it suffered a $440-million trading loss brought on by a 45-minute software glitch. The biggest customers of the company, including Vanguard and Fidelity Investments have stopped routing orders through Knight fearing collapse of the company. According to James Koutoulas, head of an advocacy group for former customers of Pergrine Financial and MF Global, “They have about 48 hours to shore up confidence.”

Currently, industry sources report that Knight is actively seeking new funding. The company said it is “actively pursuing its strategic and financial alternatives” causing concerns that the firm may be sold or face bankruptcy.

Knight was among the leading market maker in U.S. stocks prior to its rapid decline. The problems occurred from the firm’s trading software that sent bogus and rapid trades into the market for 45 minutes on Wednesday. Forty-five minutes of buying inflated stocks that was sufficient to bring Knight to its knees.

  

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Knight’s recent catastrophe caused by software glitch, and Nasdaq’s botching of the Facebook IPO which was also related to failure of automated system, once again brings the focus back on the dependency of industries on new technology. The U.S. Securities and Exchange Commission said on Thursday that it would consider whether new measures are required to safeguard markets.

Devastating failures of fully automated systems that make predictions and purchases without human supervision are making us question anew about the extent to which software should be allowed to exclude human supervision.

However, advocates of fully automated trading systems say that the fault is not with the systems but in the lack of control and maintenance at individual firms. Though Knight blamed its technology breakdown on new software that routed erroneous orders to the NY Stock Exchange, it did not offer any explanation as to why traders did not react to the obvious errors and intervene to stop them.

SEC spokesman John Nester said on the issue, “We continue to closely review the events surrounding yesterday’s trading and discuss those events with other regulators as well as Knight Capital Group.”