A trading loss that almost sent Knight Capital Group Inc. into bankruptcy may spur regulatory changes to protect against future errors by “knuckleheads,” Knight Chief Executive Officer Thomas Joyce said.
Knight was rescued by an investor group after a computer malfunction caused a $440 million trading loss on Aug. 1. The mistake resulted from Knight software that wasn’t properly installed as the market maker prepared for a new NYSE Euronext program meant to attract retail investors, Joyce said.
Regulators and market participants may examine whether trading curbs that focus on sudden price moves for individual stocks and exchange-traded funds should also consider volume, Joyce said. A review of the so-called clearly erroneous execution policy, which spells out when trades can be canceled by exchanges, is also likely as the securities industry assesses the Knight error, he said.
“There’s no reason to put a firm at risk because some knucklehead or series of knuckleheads at the firm made a big mistake,” Joyce said today at a Barclays Plc conference in New York. “If there’s an error, you should be able to fix an error.”
International Business Machines Corp. was hired to review Knight’s development process and is expected to deliver a report to Knight’s board in the next three months, Joyce said today.
While the company’s share of volume in equities and ETFs plunged on the day of the Aug. 1 error, “Knight has largely regained market share, and we did it within two weeks,” Joyce said. Resolving trading problems and getting new financing is “all for nothing if the clients don’t return,” he said.
The Jersey City, New Jersey-based company received a $400 million cash infusion through the sale of convertible equity a week after the trading loss. Shares outstanding nearly doubled to 181.7 million as Jefferies Group Inc., one of the brokerages which arranged the bailout, converted almost all of its preferred stock this month.
Knight had $510 million in cash as of Aug. 31, up from $365 million on June 30, according to today’s presentation. The company chose equity over debt because it would result in “a much healthier balance sheet,” Joyce said.