SEC Hunts Automated Trading
The US Securities and Exchange Commission Chairwoman Mary Schapiro Friday said her agency was reviewing what caused a software glitch at Knight Capital Group Inc., a brokerage firm, which threw the US stock market into chaos on Wednesday.
Calling the incident “unacceptable,” the SEC chief said in a statement posted at the agency’s website that technical problems like the one caused by Knight Capital showed how investor confidence can be shaken.
She said they would decide, based on the result of the reviewing effort, whether additional measures are needed to limit the impact of such trading disasters in the future.
Dennis Kelleher, president of Better Markets, a nonprofit that advocates for tougher Wall Street regulation, said high-speed computerized trading is one of the biggest problems facing financial markets and regulators aren’t equipped to monitor it.
“This is not a glitch or a bug, this was a massive, computer-driven, wealth-destruction event that reveals how fragile the capital market structure in the United States has become and why investors are fleeing the markets like never before,” Mr. Kelleher said.
New Jersey HQ’d Knight Capital has handled about 11% of all trades in US stocks. It primarily takes orders from retail brokerages, and then routes them to exchanges where the stocks are traded.
Knight’s trading loss has pushed the large, behind-the-scenes Wall Street firm to the brink of faliure. Its $440-M pre-tax loss equals nearly 4 times its profit last year. It exceeds the $365-M in cash on Knight’s balance sheet at the end of Q-2.
While the markets must rely on computers, regulators and market officials must still try to reduce the chances of technical errors and limit their impact when they occur, she said, who added some of the trading controls put in as a result of the 6 May 2010 ” Flash Crash” helped to limit the impact of Knight Capital’s error Wednesday.
Due to computer-trading glitch, Knight Capital’s trading activity Wednesday caused a major disruption in the stock prices of 148 companies listed at the NYSE and later announced a loss of US$440-M. It uses complex computer algorithms to trade swiftly in and out of stocks and much of its business is computerized.
The SEC said government lawyers are working to determine if Wednesday’s big trading error at Knight Capital Group violated a new rule designed to protect the markets from rogue algorithmic computer trading programs.
The Securities and Exchange Commission’s market access rule, which took effect last year, requires brokers to put in place risk control systems to prevent the execution of erroneous trades or orders that exceed pre-set credit or capital thresholds.
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Paul A. Ebeling, Jnr.
Paul A. Ebeling, Jnr. writes and publishes The Red Roadmaster’s Technical Report on the US Major Market Indices, a weekly, highly-regarded financial market letter, read by opinion makers, business leaders and organizations around the world.
Paul A. Ebeling, Jnr has studied the global financial and stock markets since 1984, following a successful business career that included investment banking, and market and business analysis. He is a specialist in equities/commodities, and an accomplished chart reader who advises technicians with regard to Major Indices Resistance/Support Levels.
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