Free Site Registration

The Rise and Fall of Knight Capital — Buy High, Sell Low. Rinse and Repeat.

Traders Magazine Online News, August 14, 2018

Bishr Tabbaa

On August 1, 2012, Knight Capital Group LLC (“Knight”), a leading financial market maker, experienced a major failure in the operation of its automated routing system for US equity orders. Knight originally received 212 small orders from retail customers and then mistakenly streamed thousands of orders per second into the NYSE market over a 45 minute period; it executed over 4 million trades in 154 stocks totaling more than 397 million shares and assumed a net long position in 80 stocks of approximately $3.5 billion as well as a net short position in 74 stocks of approximately $3.15 billion. Knight lost over $460 million from these unwanted positions, and by the next day, its own stock price had dropped by 75%, as employees, customers, and competitors stumbled to figure out what to do next. A week later, Knight received a $400 million cash infusion from a group investors, and by the next summer, it was acquired by a rival, Getco LLC. This essay will discuss the rise and fall of Knight and explain the IT matters that contributed to the system failure.

Founded in 1995 by Kenneth Pasternak and Walter Raquet, Knight Capital Group was a market maker and trade execution provider headquartered in Jersey City, New Jersey, across the Hudson river from Wall Street. The company’s bold insight was that the human-centered model of exchange trading was going to be fundamentally transformed by computers. Its primary customers were large broker-dealers, electronic discount brokers, hedge funds, and other institutional investors. Born in the crucible of the IT advances of the 1990’s and uplifted by the related growth of the technology-weighted NASDAQ stock market, Knight grew rapidly to become the single largest market maker of stocks listed on the NASDAQ (17%) and NYSE (16%). In July 1998, Knight raised $145 million in capital through its own Initial Public Offering (IPO) with a share price of $14.50 and market capitalization of $725 million. By the end of 1999, Knight’s share price had soared above $150, and its market cap had surged to $8 billion. A number of factors contributed to the increase in trading volumes on both the NASDAQ and NYSE markets including the flood of cash flows into equity-based mutual funds, historic high returns in US equity markets, the increasing number of companies going public, the emergence and market acceptance of electronic discount brokers, and multiple technological innovations such as the Internet, World Wide Web, and Personal Computer reducing transaction costs.

For more information on related topics, visit the following channels:

Comments (0)

Add Your Comments:

You must be registered to post a comment.

Not Registered? Click here to register.

Already registered? Log in here.

Please note you must now log in with your email address and password.