Knight Blames Trading Fiasco On "Dormant Program" Glitch

Tyler Durden's picture

Remember - when in doubt, always blame it on the software: that way the risk of tainting one's "business model" no matter how irrelevant and anachronistic it has become, may be preserved - after all it is the vacuum tube's fault. If possible add the words "glitch", "dormant" and "stupid algo" and always, always, use the passive voice: once again - it can never be insinuated that a carbon-based lifeform (human, monkey, Mary Schapiro) was behind the screw up. Sure enough, here comes Knight two weeks after nearly destroying its trading platform responsible for 10% of the daily market churn, and to a big extent for the endless levitation to VWAP on low volume we have seen every day for the past 3 years, and blaming it all on "dormant software" which was accidentally reactivated. From Bloomberg: "Knight Capital Group Inc. (KCG)’s $440 million trading loss stemmed from an old set of computer software that was inadvertently reactivated when a new program was installed, according to two people briefed on the matter. Once triggered on Aug. 1, the dormant system started multiplying stock trades by one thousand, according to the people, who spoke anonymously because the firm hasn’t commented publicly on what caused the error. Knight’s staff looked through eight sets of software before determining what happened, the people said." Of course, one may ask just why did someone put in code in the first place, that multiplied stock trades by one thousand: is that the special turbo buy option reserved for when the Liberty 33 phone rings?

And then there is also the whole "dormant" thing - the last time we saw that, it involved Iran, centrifuges, and a nuclear power plant. Did Knight just admit it had been Stuxnetted? That's rhetorical - of course it won't. However one thing is absolutely certain: as stock volumes continue drifting ever lower approaching zero, such glitches will become the norm as many more competitors, aka flow supply, has to be taken out in a market in which there is just no longer any trading demand. We surely can't wait to see who the next Knight proclaiming "tis but a scratch" is.

From Bloomberg:

Knight, based in Jersey City, New Jersey, hasn’t explained in detail what caused the trading losses, which depleted its capital and led to a $400 million rescue that ceded most of the company to a group of investors led by Jefferies Group Inc. (JEF) The 45-minute delay in shutting down the malfunction has confused some securities professionals, who say that trading programs can typically be disabled instantly.

 

“This software problem was an infrastructure problem,” Chairman and Chief Executive Officer Thomas Joyce, 57, said in an Aug. 2 interview with Bloomberg Television’s “Market Makers.” “It was more of a networking problem as opposed to using quantitative tools to trade.”

 

The company, whose market-making unit executes about 10 percent of U.S. share volume, will hire an outside adviser to investigate what led to the losses. Kara Fitzsimmons, a spokeswoman, said she couldn’t comment at this time.

 

The company was updating software in preparation for an NYSE plan aimed at luring more individual investors to the exchange, Joyce said in the Aug. 2 interview, without offering details. The Big Board’s so-called retail liquidity program, designed to attract smaller investors by giving them superior prices, was being implemented that day.

And so on. Those who still actually care, and trade stocks, all 3 of you, can read the full thing here.