Knight losses ignite call for stronger SEC trading oversight

Aug. 3 (Bloomberg) -- The trading losses at Knight Capital Group Inc. renewed pressure on Washington regulators to prove they are equipped to protect investors in markets that are increasingly computerized and fragmented.

The software problem, which disrupted the market opening Aug. 1, has cost Knight $440 million and left the company scrambling for a financial infusion. It comes on the heels of other high-profile technological lapses that botched the initial public offerings of Facebook Inc. and Bats Global Markets Inc.

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. “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.”

Representative Maxine Waters of California, a senior Democrat on the House Financial Services Committee, said the panel should hold hearings to get to the bottom of the turmoil.

Undermining Confidence

“Though we don’t yet know precisely what caused the problem with Knight Capital, with a drumbeat of financial market snafus continuing, it’s clear that the industry, with guidance from regulators, needs to strengthen their internal controls,” Waters said.

“Like the problems with the Facebook initial public offering, events like this only further serve to undermine investor confidence in the markets,” she said.

Representative Brad Miller, a North Carolina Democrat on the Financial Services panel, said the Knight incident makes him think that markets are “disturbingly vulnerable” and worry that “the technology is not as reliable as we need.”

The SEC, the main market overseer in Washington, fueled the march to electronic trading when it passed rules in 2005 designed to drive down costs for investors and increase competition with the then-dominant New York Stock Exchange. Now about 50 venues get trades that are mostly handled by computers.

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