The trading losses at Knight Capitl has renewed pressure on Washington regulators to prove they are equipped to protect investors in markets that are increasingly computerized and fragmented.
Bloomberg reports that the software problem, which disrupted the market opening August 1st, has cost Knight $440m and left the company looking for a financial infusion. It comes on the heels of other high-profile technological lapses that botched the initial public offerings of Facebook and Bats Global Markets.
While the Securities and Exchange Commission has issued a flurry of rules aimed at tamping down rapid market swings, some former regulators, market participants and lawmakers said the measures don’t go far enough. They called for the agency to bolster its stable of experts, tighten oversight and intensify its focus on high frequency trading.
'Things like this call the attention of regulators and people on the Hill to what really goes on in these markets --and they’ve been ignoring this stuff for years', said Bill Brown, a professor at Duke University School of Law and a former managing director at Morgan Stanley. (MS) 'I hate to say this, but I am glad the chickens are coming home to roost now before they end up doing too much damage'.
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Securities and Exchange Commission Chairman Mary Schapiro made the following statement Friday:
'The apparent trading error by Knight Capital Group on Wednesday reflects the type of event that can raise concerns for investors about our nation’s equity markets - markets that I believe are the most resilient, efficient, and robust in the world.
Reliance on computers is a fact of life not only in markets everywhere, but in virtually every facet of business. That doesn’t mean we should not endeavor to reduce the likelihood of technology errors and limit their impact when they occur.
While Wednesday’s event was unacceptable, I would note that several of the measures we instituted following the Flash Crash helped to limit its impact. Recently-adopted circuit breakers halted trading on individual stocks that experienced significant price fluctuations, and clearly defined rules guided the exchanges in determining which trades could be broken giving the marketplace certainty.
In addition, existing rules make it clear that when broker-dealers with access to our markets use computers to trade, trade fast, or trade frequently, they must check those systems to ensure they are operating properly. And, naturally, we will consider whether such compliance measures were followed in this case.
As with every significant incident of volatility that occurs in our markets, we will continue to review what happened and determine if any, additional measures are needed. That process has already begun.
In particular, I have asked the staff to accelerate ongoing efforts to propose a rule to require exchanges and other market centers to have specific programs in place to ensure the capacity and integrity of their systems. And I have directed the staff to convene a roundtable in the coming weeks to discuss further steps that can be taken to address these critical issues'.