Shares of global financial services company Knight Capital (KCG: Charts, News) closed up +0.15 or +5.28% to $2.99 per share on Tuesday. Shares rose after a televised report that the company had determined the reason for a computer glitch that led to a $440 million loss for the company.
According to the report, the software glitch was caused by outdated software that multiplied the firm’s stock orders by a factor of 1,000. The old software was accidently triggered when new software was loaded onto their system.
Jersey City, New Jersey based Knight Capital provides financial services in multiple asset classes to financial institutions, corporations and broker dealers around the world. The company maintains a global presence in America, Europe and the Asia Pacific regions.
The IT malfunction the company suffered on August 1st caused the firm to go long around $7 billion of stocks and caused the market to move erratically. The company managed to sell $2.4 billion worth by the end of the trading day. The rest of the portfolio was then sold to Goldman Sachs (GS: Charts, News) after Knight turned down a bid from UBS.
This is not the first time Knight Capital’s computers cause havoc in the markets; on May 6th, 2010 the firm’s computers caused a “flash crash” in which almost $1 trillion in market value was lost in a matter of minutes. The flash crash sent the Dow -1,000 points lower before recovering two thirds to close with a loss of -348 points on the day.
Fortunately for Knight, many of the trades which were input erroneously were cancelled in 2010, but the company was not so fortunate this time around. Due to regulations passed in September of 2010, the company was forced to take most of the trades made in error on August 1st. causing the massive loss.
IT glitches such as the one that occurred on August 1st have been met with more rules from regulating agencies. The SEC has established clear guidelines requiring technical managers to certify that appropriate market simulations have been performed before new software is implemented.
The SEC’s new rules allow for exchanges and the Financial Industry Regulatory Authority to bust trades that are at least 30 percent away from the “reference price,” usually the last sale price before prices were disrupted.
Due to this rule, only trades in six out of twenty stocks affected were cancelled. Trades in the other fourteen stocks, which did not trade more than 30 percent away from the reference price were not cancelled, with Knight having to cover the trades.
The company’s stock reflected investor confidence after the $440 million hit, dropping from over $10 per share to a little over $3 per share. The loss was met with a capital infusion of $400 million which was raised by an investor group led by Jeffries Inc. (JEF: Charts, News).
With news on Knight Capital Group having been extremely negative recently, the company’s stock has lost over 70 percent of its value since mid July. This might represent an opportunity for an investor group to take the company over, or conversely, could be the beginning of a further slide in the stock’s price. With the stock at $2.99 per share, the downside risk is limited.
Other News About KCG
Knight Capital Group Releases July 2012 Volume Statistics
The company releases its equity and foreign exchange volume figures for July.
Knight Trading Loss Said to Be Linked to Dormant Software
In depth article on the computer glitch that caused the $440 million loss.
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Cisco to report as software trend worries ease
Article on Cisco’s upcoming earnings announcement.
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