Last Wednesday, Knight Capital Group Inc. (NYSE:KCG) lost $440 million in just 30 minutes, due to an error in its new software platform. The software snafu caused Knight Capital to erroneously execute trades of 140 stocks in New York Stock Exchange.
Thomas Joyce, the CEO of Knight Capital Group Inc. (NYSE:KCG), approached SEC chairperson Mary Schapiro, immediately after the blunder to talk about having the mistakenly executed trades cancelled.
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However, Schapiro disappointed him, citing the SEC rules made after the 2010 “flash crash.” The SEC had adopted erroneous trading rules in September 2010, after the “flash crash” that happened on May 6, 2010. The Dow Jones Industrial index had fallen about 1,000 within just a few minutes, and stocks worth over a trillion dollars had evaporated. In a meeting, the stock exchanges collectively decided to cancel all the orders that were 60 percent more or less than their prices at 2:40 pm on May 6.
The Securities and Exchange Commission (SEC) laid down new rules to clarify when the erroneous trades can be cancelled. These rules allow exchanges and FINRA to break the trades that are a minimum 30 percent above or below their “reference price,” which is the price of the last transaction before the disruption occurred, and there should be at least 20 stocks involved.
Here is the official press release by SEC, announcing the erroneous trade rules.
In the case ofKnight Capital Group Inc. (NYSE:KCG)’s trading debacle, more than 20 (total 140) stocks were affected, and the exchanges had cancelled trades in only six stocks, because only six of the 140 stocks had deviated 30 percent or more from their reference price. All the other trades, which were also the results of an erroneous trading platform, couldn’t be broken, because they were less than 30 percent away from their reference price.
This resulted for Knight Capital in a loss of $440 million, as it had to sell all the erroneously purchased stocks to Goldman Sachs Group, Inc. (NYSE:GS) and other firms at heavily discounted rates. The firm was considering the option of filing Chapter 11 bankruptcy before its CEO, Thomas Joyce, negotiated a deal with a group of investors to infuse $400 million. Knight Capital’s shares slumped more than 70 percent to $3.12 per share, which were trading at $10.33 before the trading glitch. However, the stocks recovered a little on Friday on the rescue hopes.