Knight’s $440 Million Loss Spurs Questions on Trade Cancel Rules – Businessweek

By Kenneth Robson on October 9, 2012 • ( 0 )

An article by Nina Mehta on August 22 in Bloomberg Business News

Knight Capital’s $440m loss highlights the dangers of limiting human input in decisions about cancelling trades.

Regulators should have discretion to reverse transactions when the outcome puts a firm’s survival at risk – Neil Wolkoff, former chairman and CEO of the American Stock Exchange.

They should allow “do-overs” – Cromwell Coulson, CEO of OTC Markets Group. There should be provisions for system breakdowns. If there is something going haywire, the regulator should have the option to roll back the trade tape, to correct mistakes.

When Knight Capital’s computers bombarded the market with unintended orders soon after open on Aug 1, NYSE Euronext said around 3pm it would cancel transactions before 10:15am that were at least 30% away from the open price. In fact this applied to only 6 of 140 stocks reviewed.

Tom Carter, MD at Jones Trading Institutional Services, said rules for errant trades shouldn’t be made more flexible. Errant trades should be cancelled right away.

This incident follows situations in which brokers are pushing exchanges to take on more liability when they cause financial losses for member firms. Nasdaq OMX group Inc bungled the IPO of Facebook Inc May 18.