A series of mistaken trades that inflicted $440 mn worth of damage on Knight Capital last week and nearly wiped out the firm will spur stricter controls on automated trading in coming months, including new reporting and testing standards, according to multiple reports.
New SEC regulations under consideration would impose testing standards on trading firms before they go live with new trading software and require them to publicly disclose any software glitches, according to undisclosed sources cited by the Financial Times. Software testing would become a mandatory and regular feature of automated trading.
New rules under consideration by the SEC would also strengthen existing regulations on computer changes throughout the stock market, and not just at high-frequency trading (HFT) firms such as Knight, according to the Wall Street Journal.
‘I have asked the staff to accelerate ongoing efforts [regarding] a rule that would require exchanges and other market centers to have specific programs in place to ensure the capacity and integrity of their systems,’ Mary Schapiro, the SEC chairman, said in a statement following Knight’s trading loss.
‘And I have directed the staff to convene a roundtable in the coming weeks to discuss further steps that can be taken to address these critical issues. We will continue to review what happened and determine whether any additional measures are needed.’
The errant trading that nearly sparked the collapse of Knight on August 1 bolstered concerns over the unreliability of automated systems that trade hundreds of times a second and prompted calls from legislators, traders and others for tighter policing of HFT.
Knight, one of the main market makers in the US, was saved by $400 mn in equity financing by Jefferies, Blackstone, Getco, Stifel Financial, TD Ameritrade and others, according to a Knight press release.
‘Knight’s financial position and capital base have been restored to a level that more than offsets the loss incurred last week,’ says Tom Joyce, Knight’s chairman and CEO, in the release. ‘We are getting back to business as usual.’
Knight says it removed the software that caused the trading problems and is further investigating the series of trading errors, which took place the first day the firm used the new software.
In late July the SEC contracted a firm to collect real-time data to allow it to analyze automated trading data at intervals of 1/1,000th of a second in real time and enable around 100 SEC staff to make hundreds of queries a day.
