If you haven’t yet read Matthew Phillips’s fascinating tale of HFT and why the robots are now losing, I highly recommend it. Buried in the story is this reminder of what can only be described as the worst trading error of all time…
last August, Knight Capital crippled itself. Traders have taken to calling the implosion “the Knightmare.” Until about 9:30 a.m. on the morning of Aug. 1, 2012, Knight was arguably one of the kings of HFT and the largest trader of U.S. stocks. It accounted for 17 percent of all trading volume in New York Stock Exchange (NYX)-listed stocks, and about 16 percent in Nasdaq listings among securities firms.
When the market opened on Aug. 1, a new piece of trading software that Knight had just installed went haywire and started aggressively buying shares in 140 NYSE-listed stocks. Over about 45 minutes that morning, Knight accidentally bought and sold $7 billion worth of shares—about $2.6 million a second. Each time it bought, Knight’s algorithm would raise the price it was offering into the market. Other firms were happy to sell to it at those prices. By the end of Aug. 2, Knight had spent $440 million unwinding its trades, or about 40 percent of the company’s value before the glitch.
Knight fell into the arms of a savior, the company had basically blown up from this and needed a buyer immediately.
It’s a miracle the rest of the market wasn’t thrown into tumult last summer given Knight’s importance to the plumbing of so many ETFs and other settlements.