Knight Capital Crisis

October 28, 2012 § Leave a comment

Knight Capital Group is a financial services firm that experienced a debilitating trading glitch which caused rapid buying and selling of stocks. The technological malfunction occurred in early August and resulted in a pre-tax loss of $440 million. This loss was greater than the firms second quarter revenue of $289 million.

A few of the stocks included in the fluctuating buying and selling were Goodyear, Manitowoc and China Cord Blood.

Knight Capital issued a press release the day after the incident stating the issue, “As previously disclosed, Knight experienced a technology issue at the open of trading at the NYSE yesterday, August 1st. This issue was related to Knight’s installation of trading software and resulted in Knight sending numerous erroneous orders in NYSE-listed securities into the market. This software has been removed from the company’s systems. Clients were not negatively affected by the erroneous orders, and the software issue was limited to the routing of certain listed stocks to NYSE. Knight has traded out of its entire erroneous trade position, which has resulted in a realized pre-tax loss of approximately $440 million. Although the company’s capital base has been severely impacted, the company’s broker/dealer subsidiaries are in full compliance with their net capital requirements. Knight will continue its trading and market making activities at the commencement of trading today. The company is actively pursuing its strategic and financing alternatives to strengthen its capital base.”

The firm used the scapegoat crisis management strategy by blaming the issue on a new trading software that it had recently installed. The definition of scapegoat (crisis manager blames some person or group outside of the organization for the crisis) corresponds with Knight Capital’s actions with the software being considered the “group outside of the organization.”

The firm had a speedy reaction to the situation (press release within one day) and it’s August volume statistics show that numbers were still rising despite the catastrophic loss. It states that the market making trade volume in September was up 39.5% from August.

I believe that the firm made the right decision by blaming the software, because this makes it merely situational. Although it does damage the organization’s reputation, it is not irreversible. Technology is the culprit which makes it easier to be sympathetic towards Knight Capital than it would be if it were due to human error. Since the software has been removed it can be assumed that circumstances have changed and that this will not happen again.

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