The Mysterious Source Behind Knight Capital's $440 million Trading Glitch

August 14, 2012 12:23 PM EDT
Unless you are a science fiction writer, it is hard to imagine a more frightening and costly computer glitch than the one that recently crippled brokerage firm, Knight Capital (NYSE: KCG). The error cost the company $440 million, threatening its survival, and it also gave many investors a bad case of the hebejebes. Honestly, the story reads like a poorly written Hollywood script, especially considering the context of recent events which included the Flash Crash and the botched Facebook (NYSE: FB) IPO. The computers, it seems, really do have a mind of their own.

At least that is what the headlines would lead us to believe although that is probably not exactly the case, at least not with regard to Knight Capital's trading error.

According to reports today from Bloomberg, the error was caused by dormant software left on computers. The software was mistakenly reactivated when a new program was being installed. On the morning of August 1st, as orders came in, the computer error caused stock trades to multiply by exactly one thousand, said anonymous sources. Talk about a fat finger. Wait, do computers even have fingers? Either way, it was massive error.

As a result of the computer glitch, Knight Capital's orders caused massive swings in relatively stable stocks. In all, 140 stocks were said to be affected. The cost to Knight Capital was immediate and swift, and the error nearly wiped the company out completely.

Unfortunately, unlike in the movies there is no clear lesson that can be gleaned from Knight's story. Should we get rid of computers? No, that would be foolhardy. Should investment firms avoid leaving dormant software with the potential to cause disastrous trading errors on their servers? Yeah, that would probably be a good idea. But then again, hindsight is twenty-twenty.

Knight Capital shares are up 9.4 percent to $3.11.

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