The Ramifications Of Knight Capital Group's Trading Technology Glitch

| About: KCG Holdings, (KCG)

Knight Capital Group (NYSE:KCG) had a trading malfunction today that caused huge, unnatural stock moves in 148 stocks on the NYSE. The markets were roiled today from this bizarre trading, and it was reported all over the financial news. The trades happened from 9:30AM to 10:15AM.

This technology malfunction will cause a domino effect that could even propel Knight Capital into bankruptcy as a worst case scenario. The following are the ramifications that will happen to the company due to this major trading error:

1. Knight Capital will, first of all, take a trading loss in every one of those stocks that its trading blundered today. Whether the firm will directly take the loss from its own trading, or for its clients, the total loss will be substantial. Other traders who got stopped out of their trades that aren't affiliated with the company will also sue Knight Capital for losses they took from the bizarre stock moves.

One can imagine the losses that the company took by looking at the peak and low of the stocks from 9:30AM to 10:15AM. Knight Capital got the worst of it as it corrected its trading error.

Some examples of today's trading losses are:

  • Wizzard Software (WZE) went from $4 to $14 and back to $4. That's a maximum of $10 loss per share for Knight Capital.
  • RadioShack (NYSE:RSH) went from $3 to $3.60 and back down to $3. That's about a maximum $0.60 loss per share.
  • Quicksilver Resources (NYSE:KWK) went from $4.98 to $6.00 and back down to $4.70. That's about a maximum $2 loss per share.
  • Arch Coal (ACI) went from $7.35 to $7.76 and down to $7.30. That's about a maximum $0.40 loss per share.
  • Pandora Media (NYSE:P) went from $10.00 to $10.80, and back to $10.00 for a maximum $0.80 loss per share.

And those are only five of the 148 stock trades that Knight Capital will have to account for.

2. Knight Capital Group now has lost customer confidence. It has a mark on its professional record. Existing and potential clients will go to its many competitors to do its trading like Jeffries Group, Goldman Sachs (NYSE:GS), Cowen Group, and Interactive Brokers. This disaster is equivalent to a United Airlines flight crashing. Would you want to fly United after such an incident? Who knows what might happen in the future?

Clients also have to leave Knight Capital Group because they have a reputation to uphold with their own clients. They don't want the embarrassment of having to tell their clients that they are trading through Knight Capital Group. Knight Capital Group will forever have a blemish on its name now. One can partially blame the sensational manner of media spreading this disaster.

3. All kinds of lawsuits will happen. Investors of KCG stock, KCG's clients, and possibly the NYSE will sue Knights Capital for its negligence.

4. Knights Capital will have to fix its technology issues. That could take a very long time, and in the meantime it will lose much needed revenue. Today, the company told its clients to trade elsewhere while it fixes its issues. Will all of those clients return?

The company will have to hire new computer programmers, technology advisors, buy new programs, etc. to make sure that this same issue won't happen again. Because if it happens again, the company is finished.

WIll the Company bounce back from this? It's possible. However, investors shouldn't discount a bankruptcy possibility as a worst case scenario. The Company has over $5 billion in debt. We all saw the unexpected MF Global bankruptcy unfold. Once confidence is lost with these investment firms, a domino effect can happen and bankruptcy will come quickly and mercilessly.

Disclosure: I am short KCG.