The Knight Capital Group was an American global financial services firm engaging in
market making
A market maker or liquidity provider is a company or an individual that quotes both a buy and a sell price in a tradable asset held in inventory, hoping to make a profit on the ''bid–ask spread'', or ''turn.'' The benefit to the firm is that it ...
, electronic execution, and institutional sales and trading. With its
high-frequency trading algorithms Knight was the largest trader in U.S. equities, with a market share of 17.3% on
NYSE
The New York Stock Exchange (NYSE, nicknamed "The Big Board") is an American stock exchange in the Financial District of Lower Manhattan in New York City. It is by far the world's largest stock exchange by market capitalization of its listed co ...
and 16.9% on
NASDAQ
The Nasdaq Stock Market () (National Association of Securities Dealers Automated Quotations Stock Market) is an American stock exchange based in New York City. It is the most active stock trading venue in the US by volume, and ranked second ...
. The company agreed to be acquired by
Getco LLC in December 2012 after an August 2012 trading error lost $460 million. The merger was completed in July 2013, forming
KCG Holdings
KCG Holdings, Inc. is an American global financial services firm engaging in market making, high-frequency trading, electronic execution, and institutional sales and trading. The company was formed on July 1, 2013, upon the completion of the merg ...
.
Company
Knight was formerly known as Knight/Trimark Group, Inc. and Knight Trading Group, Inc. Initially, Knight Trading group had multiple offices located in the United States and in other cities around the world. Knight's Asset Management offices were headquartered in
Minnetonka,
Minnesota
Minnesota () is a state in the upper midwestern region of the United States. It is the 12th largest U.S. state in area and the List of U.S. states and territories by population, 22nd most populous, with over 5.75 million residents. Minne ...
, with offices in
Hong Kong
Hong Kong ( (US) or (UK); , ), officially the Hong Kong Special Administrative Region of the People's Republic of China (abbr. Hong Kong SAR or HKSAR), is a city and special administrative region of China on the eastern Pearl River Delta i ...
,
China, and
London
London is the capital and List of urban areas in the United Kingdom, largest city of England and the United Kingdom, with a population of just under 9 million. It stands on the River Thames in south-east England at the head of a estuary dow ...
.
Activities
Knight's largest business was
market making
A market maker or liquidity provider is a company or an individual that quotes both a buy and a sell price in a tradable asset held in inventory, hoping to make a profit on the ''bid–ask spread'', or ''turn.'' The benefit to the firm is that it ...
in U.S. equities. Its Electronic Trading Group (ETG) covered more than 19,000 U.S. securities with an average daily trading volume of more than 21 billion dollars in May 2012.
Knight also made markets in U.S. options and European equities.
In 2002, Knight paid $1.5 million to settle regulatory charges of violations such as not respecting posted quotes. Knight neither admitted nor denied the allegations. In 2004, the company paid a $79 million settlement to customers whom they had overcharged. In 2008, Knight traded an average of 3.97 billion shares per day. In 2011, the company was worth $1.5 billion and employed approximately 1450 people.
Knight has also been accused of the illegal practice of spoofing, which is a disruptive algorithmic trading activity employed by traders to outpace other market participants and to manipulate markets. Spoofers feign interest in trading futures, stocks and other products in financial markets creating an illusion of the demand and supply of the traded asset.
Offices
Knight was headquartered in
Jersey City
Jersey City is the second-most populous city (New Jersey), city in the U.S. state of New Jersey, after Newark, New Jersey, Newark. ,
New Jersey
New Jersey is a U.S. state, state in the Mid-Atlantic States, Mid-Atlantic and Northeastern United States, Northeastern regions of the United States. It is bordered on the north and east by the state of New York (state), New York; on the ea ...
. It had many offices in other US locations, as well as in the UK, Germany, Switzerland, China, and Singapore.
Operating subsidiaries
Knight Capital Group operated in four segments: equities, fixed income, currencies and commodities, and corporate. Operating business subsidiaries included Knight Capital Americas, L.P., Knight Execution & Clearing Services LLC, Knight Capital Europe Limited and Hotspot FX Holdings, Inc. Knight Capital Group discontinued operations of its asset management segment in 2009 when its subsidiary,
Deephaven Capital Management, sold most of its assets to
Stark & Roth, LLC.
2012 stock trading disruption
On August 1, 2012, Knight Capital caused a major stock market disruption leading to a large trading loss for the company. The incident happened after a technician forgot to copy the new Retail Liquidity Program (RLP) code to one of the eight SMARS computer servers, which was Knight's automated routing system for equity orders. RLP code repurposed a
flag
A flag is a piece of fabric (most often rectangular or quadrilateral) with a distinctive design and colours. It is used as a symbol, a signalling device, or for decoration. The term ''flag'' is also used to refer to the graphic design emp ...
that was formerly used to activate an old function known as 'Power Peg'. Power Peg was designed to move stock prices higher and lower in order to verify the behavior of
trading algorithm
Algorithmic trading is a method of executing orders using automated pre-programmed trading instructions accounting for variables such as time, price, and volume. This type of trading attempts to leverage the speed and computational resources of ...
s in a controlled environment. Therefore, orders sent with the repurposed flag to the eighth server triggered the defective Power Peg code still present on that server.
When released into production, Knight's trading activities caused a
major disruption in the prices of 148 companies listed at the
New York Stock Exchange
The New York Stock Exchange (NYSE, nicknamed "The Big Board") is an American stock exchange in the Financial District of Lower Manhattan in New York City. It is by far the world's largest stock exchange by market capitalization of its listed ...
. For example, shares of Wizzard Software Corporation went from $3.50 to $14.76. For the 212 incoming parent orders that were processed by the defective Power Peg code, Knight Capital sent millions of child orders, resulting in 4 million executions in 154 stocks for more than 397 million shares in approximately
45 minutes.
Knight Capital took a pre-tax loss of $440 million. This caused Knight Capital's stock price to collapse, sending shares lower by over 70% from before the announcement. The nature of the Knight Capital's unusual trading activity was described as a "technology breakdown".
On August 5, the company raised around $400 million from half a dozen investors led by
Jefferies in an attempt to stay in business after the trading error. Jefferies CEO
Richard Handler and Executive Committee Chair Brian Friedman structured and led the rescue and Jefferies purchased $125 million of the $400 million investment and became Knight's largest shareholder. The financing would be in the form of
convertible securities, bonds that turn into equity in the company at a fixed price in the future.
The incident was embarrassing for Knight CEO Thomas Joyce, who was an outspoken critic of Nasdaq's handling of Facebook's IPO.
[PALLAVI GOGOI]
Glitch causes big swings in dozens of stocks
Associated Press, accessed Aug. 5 On the same day the company's stock plunged 33 percent, to $3.39; by the next day 75 percent of Knight's equity value had been erased.
[CHRISTINA REXRODE; GOGOI PALLAVI. "Cost of glitch for Knight Capital: $440 million." AP Worldstream. Press Association, Inc. 2012. HighBeam Research. 5 Aug. 201]
See also
*
Dark pool
*
Market maker
A market maker or liquidity provider is a company or an individual that quotes both a buy and a sell price in a tradable asset held in inventory, hoping to make a profit on the '' bid–ask spread'', or ''turn.'' The benefit to the firm is that ...
References
External links
Official websiteSEC reporton the 2012 trading error
{{Authority control
Companies listed on the New York Stock Exchange
Financial services companies based in New Jersey
Companies based in Jersey City, New Jersey
Financial services companies established in 1995
Software bugs
2013 mergers and acquisitions