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Knight Capital (KCG -62.8%) -12.4% AH on bankruptcy fears, even as it's reported Goldman...
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Thursday, August 2, 2012, 6:36 PM ETKnight Capital (KCG -62.8%) -12.4% AH on bankruptcy fears, even as it's reported Goldman and Sandler O'Neill have been hired to find a buyer. Knight's books have been opened up to P-E firms and at least one rival (Virtu Financial?). Bloomberg Businessweek provides the back-story for Knight's $440M loss. Between 9:30 and 10:00 AM ET yesterday, one of Knight's algorithms went haywire, pushing through 4M extra trades (550M shares) related to nearly 150 stocks. Update: Fox Business claims Virtu Financial isn't interested.
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If Congress is willing to pull Dimon out onto the carpet, why are they not doing the same thing to these executives, and bring out the HFT into the spotlight for some fair scrutiny. As of now, no one knows who the hell, or what the hell is governing or guiding HFT. There are no rules, there are no limitations as to the damage these idiots can do to our wealth. The flash crash is just the tip of the iceberg. Just wait until 3 or 4 of these machines go haywire at the same time attempting to out trade each other! What do you think will happen then? It will crash the whole system.
Of course, all of us are electronically trading using software that has likely been tested no better than that which bit Knight.
Software QA and other testing has advanced significantly over the last 10 years, but the bottom line always rules. Investor beware.
As for HFT, live by the sword, and die by the sword. Going back to the days of Harold Bradly when he and other simple minded traders demanded that they price their own merchandise and demanded that they have direct access to the markets...well, they got exactly what they wanted. Except, like most things on Wall Street, they forgot to think the whole thing all the way through. As fast as You can price your merchandise Harold, i can price mine faster.
How's it feel now?
Another example was a in house CRM software implementation of a couple hundred million dollars. Never worked and the code was completely scrapped. Luckily a couple hundred million for this company was not life threatening, but the equity sponsors were quite upset...
Anyway, it should not be made into moral tale about computer driven market making. This stuff happens in all industries.
There are a couple of reason why this discussion morphs into 'bank bailouts'.
First of all, Knight is a very large player on the street. Billions of dollars of trades go through their shop every day. If they blow up, and lest we forget that all of the major trade counter parties these days are BANKS (GS, JPM (obviously), MS, DB, etc.) thus they(the banks) are out billions of dollars, and so on and so on. First thing you know we'll get another Hank Paulson speech on 'if we don't save these guys (with taxpayer dollars) the world will collapse by sundown.
And secondly, if a chemical company doesn't work, the world doesn't care, but places like CNBS have made wall street into a razzle dazzle casino where the whole world watches every move with baited breath. Suddenly Wall Streets problems morph into headlines WAY beyond the importance of what goes on in secondary market trading of stocks. And then we have the paid for politicians who are worried about their share of the action through 'campaign contributions' and 'lobbying' disappearing from their coffers and suddenly we need a 'bailout'.
So sadly, bailouts are truly a part of this whole thing, whether it is appropriate, or not (in my opinion not, but that won't get you cab fare in most places).
Finally on Friday the SEC rang in and offered a small statement. By next week the clowns in Washington will want 'hearings' so they can parade the dogs and ponies in front of the taxpayers before they take the animals to lunch and make sure their 'donations' are still intact.
Sadly, it is all a big circus. Wouldn't it be wonderful to see dignified ways return to Wall Street, and Washington?