Last week, Knight Capital, a multibillion trading company that was one of the pillars of Wall Street, was very nearly destroyed in a single day by a computer glitch. The Wall Street Journal reported:
Knight, a 17-year-old firm, is considered a pillar of the stock market, matching buyers and sellers for some $20 billion in trades a day on the New York Stock Exchange. Knight uses complex computer algorithms to trade swiftly in and out of stocks while retail brokerages rely on the company to execute billions of dollars of trades a year for small retail customers. The firm is also one of the biggest firms to handle trading in exchange-traded funds. While it has humans on hand to do some trading, much of its business is now computerized.
The loss exceeded Knight’s $365 million cash on hand at the end of the second quarter. Most of the trades were made Wednesday between 9:30 a.m. and 10:15 a.m. That would equate to about $10 million a minute.
The computer program that caused the glitch was designed to integrate with a new system being installed Wednesday morning by the New York Stock Exchange, Knight Chief Executive Thomas Joyce said on Bloomberg television on Thursday.
But an error in the Knight software caused a malfunction. By the time engineers could switch it off, millions of trades had gone through.
Think about that: the company was nearly destroyed in about 45 minutes, by a software glitch. Henry Blodget is worried:
So, what does all this mean? Will Wall Street and regulators finally wake up to how much the world has changed in the past decade–and do something about it?
Unlikely, says Scott Patterson, a Wall Street Journal reporter and the author of DARK POOLS: High-Speed Traders, A.I. Bandits and the Threat to the Global Financial System.
The Knight Capital disaster, along with the many technical problems that have preceded it, should be taken as a sign of how much unseen technology risk has entered the financial system in recent years, Patterson says. Computer trading systems and exchanges have now gotten so complex that the the next Knight Capital may be a “Too Big To Fail” bank, which wakes up to find that a similar “glitch” has blown a multi-billion-dollar hole in its balance sheet. Unlike Knight Capital, that glitch will necessitate another taxpayer bailout and further undermine confidence in the global market system.
Regulators and Wall Street should be terrified by what happened to Knight, Patterson says. But, most likely, as with other warning signs, this latest technology problem will just lead to discussions that will then go nowhere.
To think that a pillar of Wall Street can crumble in less than an hour because of a software glitch is to realize that the financial weapons of mass destruction are very much with us, and threaten us at every moment. Who can stop them? Who will stop them?