Wednesday, August 1, 2012

Knight's algo glitch creates havoc for a number of stocks

US stock markets continue to be vulnerable to electronic glitches triggered by a single participant. Algo-based order execution is becoming the predominant way to trade equities. A large number of investors who have nothing to do with high frequency trading in general and plan to hold investments for some time use algo routines for efficient and cheap execution (using routines like Sniper, Guerilla, Stealth, etc.) And when the algos are in charge, a glitch could quickly move markets in individual stocks.

A glitch at Knight Capital (brokerage firm) today caused large unexpected spikes/declines in a number of stocks.
MSN: - The story is still developing, but the problem seems to be at market maker Knight Capital, which has told clients to reroute trades to other brokerages because of a delay in order processing. Order handling and execution of nonlisted securities, smaller over-the-counter issues, seem unaffected.

Rumors are floating that Knight has a problem with one of its algorithmic computer trading systems.
The rumors have in fact been confirmed - Knight did have a problem they are still working through. Note that Knight is not involved with high frequency trading. They use algos to provide efficient execution for their brokerage clients.

Dole Foods (DOLE) shares morning spike due to an algo glitch (source: Bloomberg)

At this point there will be no shortage of investors who will claim damages from these price swings. And Knight will have to settle. Plus the SEC will likely be all over this with a lengthy investigation and possibly a fine. Needless to say Knight's shares took a dive.

Knight Capital Group (KCG) share price (source: Bloomberg)

As more of the execution shifts to these types of algos, the risks of single player glitches impacting the market will only increase. The key will be to identify and control such problems in real time.
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