Knight Capital future in jeopardy over botched software upgrade

Knight Capital Group, which trades 3.3 billion shares a day on average, is in a race against the clock for its survival after a software update trigged a $440 million loss.

A botched software upgrade could put one of Wall Street's leading market makers on life support.


Knight Capital Group this week botched a software upgrade that triggered erroneous New York Stock Exchange orders at market open Aug. 1. These orders resulted in a $440 million pre-tax loss. The problem? As of June 30, Knight had $364.8 million in cash and equivalents.

The company has until Monday night to find enough cash---via credit lines, cash infusions or an investor---to settle the trades.

In a statement, Knight Capital, which also lost $35.4 million related to the Facebook IPO in its second quarter, outlined the software glitch.

Knight experienced a technology issue at the open of trading at the NYSE yesterday, August 1st. This issue was related to Knight's installation of trading software and resulted in Knight sending numerous erroneous orders in NYSE-listed securities into the market. This software has been removed from the company's systems.

Overall, about 150 stocks were affected as a wayward algorithm flooded them with buy and sell orders. Knight's software update was tied to a new NYSE trading platform.


KCG stocks plummet

The IT woes at Knight have created a cascade effect. To wit:

  • Many institutional traders such as Fidelity, Vanguard and others aren't using Knight.
  • Knight had to turn away trading volume earlier this week since it didn't have the capital to back up trades. The Wall Street Journal reported that Knight can now handle trading volume, but skeptics abound about Knight's future.
  • The company just secured a credit line to buy it time, but according to the Wall Street Journal and other reports Knight has to find a buyer or cash infusion this week or it's done. Knight said it "is actively pursuing its strategic and financing alternatives to strengthen its capital base."

What's shocking about the Knight situation---as well as other algorithm and software issues with Wall Street systems---is that one screw-up can wipe out a company. Knight isn't some dinky player. Year-to-date Knight has traded $21.5 billion worth of stock a day on average as well as 3.3 billion trades a day.

As trading becomes faster the technology debacles become even more deadly.

Barclays Capital analyst Roger Freeman said in a research note:

As we have seen over the past few years, capital markets companies are able to operate on a day-to-day basis because of customer and counterparty confidence. When that confidence deteriorates, fundamental analysis takes a distant backseat to circumstance.
This time, KCG finds itself in this situation. It is an unfortunate position for a company that, while facing difficult times due to a technology mishap, actually has proven itself over the years as a very adept and technologically capable market-making platform that
has withstood the test of numerous periods of challenging market environment, even thriving during some of the most difficult periods.