Thursday, August 2, 2012
The Knight Fiasco: How Did It Lose $440 Million? - By Bob Pisani
How did Knight lose $440 million?
Well, that didn't take long. Knight Capital announced a pre-tax loss of approximately $440 million on its "technology issue" yesterday, and also said they had traded out of its entire erroneous trade position.
Wow: $440 million? How on earth did it lose that much? It's easy to see. I noted many times yesterday that the volume in the first half hour of trading on the New York Stock Exchange floor was titantic: shortly after 10 a.m. ET, it was about 300 million shares, well more than twice normal volume at that time.
This would indicate that the trading program that came out of Knight resulted in millions of duplicate trades. And it was not going to get much relief in the form of busted (erroneous) trades. The NYSE last night busted trading in only a half-dozen stocks and declared that "no additional symbols will be considered for review."
The NYSE was not being mean-spirited: The definition of what constitutes an "erroneous" trade is very carefully defined, and the NYSE determined that based on that definition only a half-dozen stocks fell into that category.
Once that happened, Knight was faced with tens of millions (at least) of trades that were not clearly "erroneous," but which it is likely liable to cover. At that point, it was just a matter of doing the math.
That's why it was able to come up with a number so quickly.