Yesterday, a “technology issue” in the form of an electronic trading glitch at the Knight Capital Group brokerage firm caused confusion in the stock markets. According to the Wall Street Journal, at the beginning of the trading day yesterday, “Knight's computer program appeared to spit out duplicate buy and sell orders, jamming the market with high volumes of trades that caused the wild swings in stock prices.” For instance, the insurance company Berkshire Hathaway experienced “more trading in the opening hour than it does in a typical day.”
Another WSJ story states that Knight Capital is the “biggest handler of stock orders for U.S. retail brokerage firms” and averages around 725 million shares a day. In comparison, the NYSE trades about one billion shares a day.
An investigation has begun into the “Knightmare on Wall Street,” as it's being called, by regulators, who, in the aftermath of the NYSE flash crash in 2010, had already been investigating how the consequences of algorithmic trading systems glitches can be reduced, better contained, or unraveled. The flash crash was a major source of lost investor confidence in the integrity of the stock markets, which have suffered several other major glitches as well over the past few of years. The Knightmare won’t help.
Knight Capital saw its own stock price drop yesterday by one-third after it was identified as the source of the glitch. Some are apparently seeing that as justified comeuppance for the company, which was highly critical of how NASDAQ handled the Facebook IPO.