SEC chair Mary Schapiro came down staunchly against Knight Capital LLC after its computer trading debacle on Wednesday, August 1, forcing the firm to find help elsewhere as it faced debilitating losses. The computer trading error has prompted the SEC to step up mandates that exchanges and other trade centers ensure the integrity and capacity of their systems.
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Such errors significantly erode confidence in the capital markets. This was no more evident than during the Knight trading snafu when even its best customers halted routing any trades at all through Knight.
There are a couple of rules already in place which Schapiro says lessened the impact of the snafu. First, there are circuit breakers that were recently instituted to halt trading on stocks undergoing wild price volatility. These also identify which trades are allowed to be broken.
Second, there is a requirement for companies who enter the market to trade fast and furiously to check their operating systems for possible malfunctions. Whether Knight followed these rules is the focus of an upcoming SEC investigation
A trading group ultimately came to Knight’s rescue as it teetered on the brink of evaporation. But the firm’s troubles may not be over yet.