This is a detailed account of the events leading up to this high frequency trading glitch, and how the problem unfolded on August 1.
Automated market making trading can be highly profitable, but it was competition from the NYSE itself that prompted Knight Capital to modify its software to participate in the introduction of what was called the Retail Liquidity Program.
It is thought that it may have been testing software that was inappropriately triggered, which resulted in the company taking billions of dollars of buying positions, many of which could not be unravelled when the problem was discovered. Goldman Sachs came to the rescue purchasing positions at a discount.
The outcome was a $440 million loss. The CEO Thomas Joyce, by virtue of the respect with which he is held in the industry, was able to negotiate assistance from other financial institutions, and stave off bankruptcy.
Categories: Trading opinion