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Knight Capital (KCG -62.8%) -12.4% AH on bankruptcy fears, even as it's reported  Goldman...

Knight 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.
Comments (12)
  • Matthew Davis
    , contributor
    Comments (3816) | Send Message
    Down with HFT, its time for the real investors to reject firms that use this technology and I will move my accounts to the first major Market Trader (etrade, ameritrade, scottrade, ect) that speaks out openly against this practice. Since Congress and the SEC refuse to take action, the investors must do the right thing.


    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.
    2 Aug 2012, 06:38 PM Reply Like
  • chopchop0
    , contributor
    Comments (3304) | Send Message
    Glad to see the market take out KCG, a victim of its own HFT algorithim.
    2 Aug 2012, 06:58 PM Reply Like
  • Noreika
    , contributor
    Comments (459) | Send Message
    I couldn't agree more.
    3 Aug 2012, 08:43 AM Reply Like
  • Storm Warning
    , contributor
    Comments (156) | Send Message
    Ouch! A little issue with software quality.


    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.
    2 Aug 2012, 07:01 PM Reply Like
  • Matthew Davis
    , contributor
    Comments (3816) | Send Message
    HFT is just legalized cheating. Its not better than allowing congress to do insider trading. You have these algorithms calculating trades to skim pennies off of trades, and in such high volumes they make millions off the thinnest margin. It happens in the blink of an eye, which disadvantages us who sit there trying to make a decision while the price fluctuates drastically through out the day.
    2 Aug 2012, 07:06 PM Reply Like
  • Ted Bear
    , contributor
    Comments (597) | Send Message
    Not to change the course of the thread, but yes, these algorithms which we all think are so 'fancy' are quite amateurish in reality. I have seen the 'guts' and your jaw would just drop if you saw how naive they are. What is even more shocking is that for all of their supposed 'sophistication' they have no internal circuit breakers'. That alone is remarkably shocking, and points to how poorly designed they really are. Basically, they don't even have an 'off' switch in simple terms.


    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?
    3 Aug 2012, 08:08 AM Reply Like
  • sethmcs
    , contributor
    Comments (3195) | Send Message
    To those who complain about HFT probably do not remember the days when the specialist made the markets and the bid ask spread was in 1/8s. Talk about skimming off the top. As long as you use limit orders and no stops the HFT cannot hurt you. They can actually make you a lot of money. Volatility is how you make money off of stocks. Buy low sell high or sell high and buy low.
    3 Aug 2012, 01:22 AM Reply Like
  • Matthew Davis
    , contributor
    Comments (3816) | Send Message
    Up 3% 3M shares sold, did they find a buyer before the rest of us know?
    3 Aug 2012, 08:57 AM Reply Like
  • Jeremy Johnson, CFA
    , contributor
    Comments (779) | Send Message
    This is not any different than building a chemical plant and you go to turn it on and it doesn't work. Even in today's world it happens -- the fund I worked for was involved in $300 million new build chemical plant that just wouldn't work. Never produced a usable drop. It was sold for scrap value to some company that specialized in that sort of thing. Thankfully I was not the analyst involved in that deal.


    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.
    3 Aug 2012, 02:55 PM Reply Like
  • mjk0259
    , contributor
    Comments (608) | Send Message
    Yes but if a chemical company goes bankrupt, not much impact. If a big bank ends up going bankrupt from this type of activity, the government will probably bail them out which I have to pay for. And what is the value to the average person of HFT - provides liquidity? Not a very clear payoff considering most people never even buy a stock directly. But if some financial disaster arises from it, they will end up paying for it.
    3 Aug 2012, 03:07 PM Reply Like
  • Jeremy Johnson, CFA
    , contributor
    Comments (779) | Send Message
    How did we get on the subject of big banks receiving bailouts? Knight is a relatively small equity market maker.
    3 Aug 2012, 04:14 PM Reply Like
  • Ted Bear
    , contributor
    Comments (597) | Send Message


    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?
    4 Aug 2012, 02:33 PM Reply Like
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