Knight CEO Comments On Algo Failure Which Has Cost Him 70% Of His Market Cap In One Day

Tyler Durden's picture

Here are the choice highlights from the interview with Knight CEO Tom Joyce, who is
inexplicably on Bloomberg TV without any clear point, purpose or spin,
and nothing to tell anyone and restore confidence.

  • TECHNOLOGY BREAKS. WHAT HAPPENS NEXT IS HOW YOU ESCALATE IT. WE'RE PROUD OF THE FACT THAT WE ESCALATED TO IT DIRECTLY TO OUR CLIENTS AND GOT THEM OUT OF HARM'S WAY. THERE ARE TWO THINGS WE TAKE GREAT PRIDE IN WHICH IS OUR CLIENTS' FOCUS AND OUR CULTURE WHICH IS INVOLVED WITH COMPLIANCE. WE HAVE A CULTURE OF COMPLIANCE AND CLIENT FOCUS AND WE ASSERTED BOTH OF THOSE THINGS YESTERDAY.
  • IF YOU GET INVOLVED IN THE DAY TO TAKE MINUTIA, THIS WILL GIVE YOU A HEADACHE OCCASIONALLY
  • IT DOES AFFECT THOSE WHO MIGHT LOOK TO BUY KNIGHT CAPITAL STOCK. WOULD YOU BE INTERESTED IN BUYING SHARES OF A COMPANY THAT WITHIN -- WITHIN A DAY OR TWO COULD GET WIPED OUT?
  • OF COURSE NOT, THIS IS AN ANOMALY. YOU CANNOT KEEP PEOPLE FROM DOING STUPID THINGS WHETHER IT IS WRITING IN PERFECT CODA BUYING THE WRONG SOFTWARE AT THE WRONG TIME. THAT IS WHAT HAPPENS WHEN YOU HAVE A CULTURE OF RISK.
  • YOU STAY AWAY FROM THE DAY- TO-DAY MINUTIA AND LOOK FOR THE LONG TERM, AS AN EQUITY INVESTOR, IT WILL WORK OUT.
  • WE'RE OPEN FOR BUSINESS. WE GOT RID OF THE BAD TRADES AND FREE UP A LOT OF CAPITAL. WE HAVE EXCESS CAPITAL RIGHT NOW.
  • JOYCE SAYS 'WE ARE OPEN FOR BUSINES,' 'WE'RE REASONABLY BUSY'

And the kicker:

  • WE NEED TO DO A BETTER JOB ON OUR TESTING ENVIRONMENT.

Translation: we are shopping ourselves right now and unless someone pick us up by end of trading when the margin calls come in, tomorrow's open may be a little problematic. Of course, JPM will mysteriously step up in the last minute and provide a DIP-like loan in the process onboarding all the "segregated" accounts.

  • KNIGHT BONDS FALL 13.125 CENTS TO 70 CENTS ON DOLLAR

Quite soon we may find out what it means to trade in a market which has just lost one of its key market makers, responsible for up to 15% of overall liquidity.

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GMan_'s picture

REvenge is a dish best served cold NITE.

dow2000's picture

That's it, I fucking quit this market, I'm out!

BaBaBouy's picture

Casino NYSE... eTITANIC In Waiting ???

How Long before This Split-Nanosecond-Algo iPOD eTRADING collapses Whats Left of the Markets ?

 

Bananamerican's picture

"WE'RE PROUD OF THE FACT THAT WE ESCALATED TO IT DIRECTLY TO OUR CLIENTS..."

Joycean slip? What does that even fucking mean??

Will "Re-Joycing" come along to replace "Corzined" on ZH?

Gotta love that "CULTURE OF RISK."....motherfuckers...

glenlloyd's picture

Everything he said was garbage....it's just words that mean nothing.

overbet's picture

Selling KCG 2.5 puts expire in 2 weeks with 350% vol free $

OpenThePodBayDoorHAL's picture

wow, are they brass and the size of grapefruits? That's some stones you got there pardner...

monkeyboy's picture

CEO Knight will still be good to collect his payout & bonus, right?

Carl Spackler's picture

On the CEO comp...I HOPE not, AND we desperately need a regulatory CHANGE on HFT policy.

Good NITE, Irene !

The Big Ching-aso's picture

 

 

The next fiscal year-end Knight Board meeting......................

"So it's near unanimous.  The Board hereby approves Tom's full bonus for 2012.    Frank?"

"Let the record show I withheld consent because of 70% market loss due to incompetence."

"Everyone else disagrees with you, Frank.  Tom did an outstanding job.  It could've been 90%."

"Point well taken."

 

Simulacra10's picture

Awesome way to work in War Games :)

Muppet of the Universe's picture

Knight Capital recently purchased the futures accounts from Penson International, after Penson Clearing joined forces with Peak6 to create Apex Clearing.  Penson, an 11 cent stock lol, is now a subsidiary of Apex.

But here's where it gets interesting.  Penson's clearing of futures accounts covers well over 10 online brokers.

Now that Knight Capital is the clearing agent for these futures accounts, what happens to all of the futures accounts for these 10+ online brokerages, including popular ones such as ToS...

If Knight goes bankrupt, after their recent debocle with the FB IPO bungling and countless lawsuits aimed at them, including a 350 million dollar one by UBS, and now the 400+ million losses from yesterday, does rehypothecation play a role?

What happens to these futures accounts?  will they be rehypo'd to JM Morgan? 

What will happen to the futures market if a forced liquidation occurs?

 

Nadaclue's picture

Yes, the balloon has definitely gone up. These financial markets will continue to be a slow motion train wreck, until it's not and goes virtually all at once.

 

bdc63's picture

so this is what a black swan looks like ... hmmm .. I had something entirely different pictured ....

Muppet of the Universe's picture

I'm seriously really fuckin scared right now.  I'm short the Big Dow with practically everything XD

fiftybagger's picture

Betting the house's chips to get more of the house's chips? What will you do when the house goes bust?

Silver For The People

http://www.brotherjohnf.com/

http://www.brotherjohnf.com/forum/

http://www.youtube.com/user/BrotherJohnF

 

The Big Ching-aso's picture

 

 

I hope it wasn't like a Fuxtnet virus.

Matt's picture

Is this a black swan? I mean, really, after the 2010 Flash Crash, wasn't this more like an inevitability than an unexpected or improbable event? 

CrazyCooter's picture

A wise mind once said "never assume malice where incompetence will suffice" ... however, I think the malice angle could have a lot of merit in this case.

Were they hacked and someone got ahold of their code, tweaked it, and blew them up? Maybe. Was it on purpose, to scuttle the ship so to speak? Maybe. Was it genuninely a mistake, made it past all the gate keepers, testers, and overseers IN THEIR PRODUCTION ENVIRONMENT when EVERY TRADER OUT THERE watching these symbols saw this freak out go minute after minute and did nothing because they didn't know? Mabye.

Seriously?

How a firm could lose 70% of its market cap (this isn't the total volume of trades, just the losses) NOT NOTICE this volume of activity!?!? So, that means, any of their traders, at any time, could have just bought the whole fucking Dow and went to lunch while their orders filled? Serously?

There is a lot more to this story, as we will find out in the coming months...

Regards,

Cooter

Overflow-admin's picture

I just can't add anything morea accurate at the time.

Maybe a resumé? CRIMESCENE.

malikai's picture

You can count on it.

IIRC Apex also picked up that dogshit racetrack bond and it's losses in that deal. So add another what, $30 mil? Just to set the stage.

Edit: All it took to send PNSN to purgatory was that $30mil and a few other losses elsewhere.

Muppet of the Universe's picture

holy shit, are you sure they didn't have any other major losses? For instance maybe bad debt after 2008 crash?

malikai's picture

PNSN didn't have much exposure to CDOs and the rest of that, instead they failed in risk management as well as general management/board stupidity. Bog standard stuff really. What really got them was the losses in Canada on some other shady deal I can't remember and then finally the Racetrack bond. It was tiny compared to their "funding", which of course included client money, but that doesn't matter.

SilverRhino's picture

At this point in the game if you are stupid enough to still be trading and you see shit like this?  GTFO and perform the only true segregation of your funds from the companies in question.   CASH OUT & Bank of Sealy.

 

FeralSerf's picture

Did you just buy a new mattress?  There was an unmarked white van in front of your house removing the old one.

Buck Johnson's picture

They have been using those customer accounts.  Do any of you remember them talking about that it's not illegal for the funds to use segregated accounts, just unethical.  As I said before why would Knight by Penson for 5 million?  It wanted and/or needed the 411 million in segregated accounts it had.  We are in a slow trainwreck.

bdc63's picture

It's just a flesh wound

LeonardoFibonacci's picture

Couldn't have happen to a much better deserving bunch of thieves.  With audited statements from the accounting firm of Dewey, Screwem & Howe.

redpill's picture

Ships break, icebergs happen.  We're taking on water but we haven't sunk yet and the band is playing.  We just need to test our hulls better in the future.

sodbuster's picture

And re-arrange the deck chairs!

malikai's picture

Sir, would you like to say anything to the hundreds of people jumping overboard into the icy water?

Turin Turambar's picture

Pull the fat lady off of the flotsam.  2 skinny people can be saved instead. ;-)

slyhill's picture

This would be a brilliant attempt at taking the company private. But I think that is giving them too much credit...

DeadFred's picture

Nothing has happened here that a good number of puts and releasing the flash-crash algos won't take care of.

TheFourthStooge-ing's picture

We've managed to reduce headcount in IT, which should give us an end-of-quarter boost.

malikai's picture

As I said.

Deploy the Squid, prepare the Morgue.

disabledvet's picture

Same platform apparently...so certainly they could do it. "Motive, means and opportunity" problem again.

Captain Benny's picture

Translation:  They haven't a clue where the bug originated or the triggering factors.

Carl Spackler's picture

Winner, winner, chicken dinner!

Captain Benny, you are the contest winner!

("Tell me what I won, Johnny...Well we have a beautiful package of NITE call options for you with a strike at $12.50/share.  Fun at parties.")

cougar_w's picture

They know what happened, but the fucking MBA CEO wouldn't be the one talking about it.

They probably already know everything. It's been 24 hours, they know everything. What nobody can explain is why the broken trades went out for 30 minutes. It would take less than 30 seconds to gracefully shutdown a bad market making engine, assuming one did not simply pull the network cables off the front.

Nobody was at the wheel, is why it went on. I wonder if their entire IT team is outsourced.

Overflow-admin's picture

Even if it was outsourced, it doesn't explain why there wasn't anybody or any TRIGGER (see the programming definition) to shut down the beast. Instead, me thinks, many, many triggers must have been disabled for this to happen. Take all the tapes as EVIDENCE and compare the database STORED PROCEDURES and TRIGGERS for your CONCLUSIONS.

That was a free IT advice.

Cult_of_Reason's picture

Headline reading algos are taking over the market again after this headline:

IMF says Fed should consider further securities purchases, especially MBS

PicassoInActions's picture

i can provide a help with more testing ( over 15 yeas expirience ) with their clients money.

JohnG's picture

 

 

Someone should tell the idiot that real code is tested into existence.  Only a certified fool would write code without first writing the tests.  THIS is how errors are prevented.

cougar_w's picture

I write code for a living. I've written some really complicated things but probably nothing close to what these guys are running. I don't think you can actually test code this complex. And since that is the case, they should not have access to anyone's money, and should have no Federal backups or bailouts.

ExpendableOne's picture

Hopefully the people who wrote it did not also do the testing.  Also, is it possible that someone was watching how this code performed?  Perhaps someone noted a pattern and took advantage of it....