The crisis situation chosen for the assignment is about the Knight Capital Group’s trading issue in the third quarter of 2012, which wiped off over 75% of Knights’ market capitalization.
Knight Capital Group, is a global financial services that provides market making, electronic execution, and institutional sales and trading for its clients. At its peak, the firm’s high-frequency trading algorithms accounted for almost 20% of all U.S. equities, with a market share of 17.3% on NYSE and 16.9% on NASDAQ. Knight Capital Group’s $440 million trading loss stemmed from an old set of computer software that was inadvertently reactivated when a new program was installed, according to company sources. Once triggered on Aug. 1, the dormant system started multiplying stock trades by one thousand, according to the New York Times.
The magnitude of the crisis was further fueled by Knight’s initial lack-luster response. As a flood of faulty trades were executed that fateful August 1st morning from a Knight Capital trading program, no one at the firm managed to stop it for more than a half-hour. This is critical because in a market of high frequency and speed, trading losses can pile up in seconds. According to unconfirmed reports, alarming messages were sent to Knight managers, who failed to act in time - executives typically have a simple command that can immediately halt trading.
As shown in the graph below , the crisis impacted mostly the company and its shareholders. The company was widely reported to have lost $440 million by the end of the trading day, while shareholders suffered a more damaging 75% reduction in market value of their shares from about $10.33 per share at the beginning of the trading day on August 1st, to close at $2.58 on the next business day. Other stakeholders are general investors and companies – about 150 securities – whose stocks were affected by the software glitch.
Furthermore, the integrity of the capital markets was questioned....
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