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Knight Capital and the $440-million glitch

Traders work at the Knight Capital kiosk on the floor of the New York Stock Exchange. The market maker said a technology issue had affected the routing of shares of around 150 stocks to the New York Stock Exchange Wednesday, where abnormal volatility roiled the markets in early trading.


The brokerage responsible for Wednesday's extreme weirdness in the U.S. stock market is fighting to shore up its finances after revealing the trading fiasco cost the firm approximately $440-million (U.S.).

Whether New Jersey's Knight Capital Group Inc. finds fresh sources of funds or enters a downward spiral, the deeper problem remains.

Wednesday's events are the latest in a string of strange occurrences that give you the distinct sense that everything is not quite under control in the stock market.

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The common thread in each of these instances: computer-driven trading operating in huge volumes and at high speeds.

Proponents of the march of the machines point to its many benefits, which include greater liquidity in markets – in other words, it's easier for investors to get in and out of stocks in a manner that is efficient, cost-effective, and fast.

The volumes involved are immense and Knight Capital, a major market-maker, was a beneficiary of the trend. The firm was responsible for 11 per cent of all trading in American stocks between January and May, the New York Times reported, citing statistics from data firm Tabb Group.

But when the system backfires, it does so in spectacular fashion. The "flash crash" of 2010 – where errant futures trades set off a heart-stopping 5 per cent plunge in major U.S. indices in a matter of minutes – is the starkest example.

In response, regulators put in place new controls to catch, stop, and track aberrant trading. While welcome, such changes don't address the root of the issue – namely that when firms have enormous pipes (figuratively speaking) funnelling computer-driven trades into markets at lightning speed, any misstep can be gigantic.

In Knight's case, what the company termed a "technology issue" caused price swings and surging volumes in about 150 stocks for roughly forty-five minutes on Wednesday morning. The company then advised clients to route their trades elsewhere as they attempted to solve the problem.

In a broad sense, however, investors don't really have anywhere else to go, since computer-driven trading appears to be here to stay. And that's enough to make even seasoned professionals nervous.

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As Clive Williams, the global head of equity trading at mutual fund company T. Rowe Price Group told The Wall Street Journal, "this race for speed is just very, very dangerous."

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