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Knight and SEC Reach $12m Settlement Over ‘Glitch’ Charges

Knight Capital Americas has agreed to pay $12 million
to settle charges made by the Securities and
Exchange Commission (SEC) following its system
meltdown last year, which brought the firm close to

The regulator investigated the causes and preventability of
last August’s technology failure, in which a faulty router sent
over four million orders clocking up several billion dollars in
unwanted positions for the firm.

This so-called technology glitch cost the market maker
$460 million, forcing it to seek emergency funding and
eventually leading to its merger with Getco to form KCG.

While not admitting or denying the findings, Knight Capital
consented to pay the penalty after the regulator’s investigation
concluded that the firm itself was responsible for the market
disruption caused.

In the SEC’s first enforcement of its market access rule,
introduced in 2010, the agency concluded that Knight did not
have adequate safeguards and had failed to conduct adequate
reviews of its controls.

“The market access rule is essential for protecting the
markets, and Knight Capital’s violations put both the firm and
the markets at risk,” says Andrew Ceresney, co-director of the
SEC’s Division of Enforcement.

According to the SEC, Knight was responsible for two
‘critical technology missteps’ dating back to 2005 when it
moved a section of computer code in an automated equity
router, rendering a function of the router defective.

Although this function was not meant to be used, Knight
left it in until July 2012 when it deployed new code in the
same router, ultimately causing the haywire algo messages.

The SEC also found that Knight had been provided with an
opportunity to identify and fix the problem before the markets
opened on August 1, but had failed to act upon it.

Daniel Hawke, chief of the SEC Enforcement Division’s
Market Abuse Unit, explains that the agency sees a
distinction between “calling something a glitch that is
inevitable in many technology systems and applications
versus something that is about failure to adopt controls.”

“Brokers and dealers must look at each component in each
of their systems and ask themselves what would happen if the
component malfunctions and what safety nets are in place to
limit the harm it could cause.

“Knight Capital’s failure to ask these questions had
catastrophic consequences,” he adds. 

Paul Gogliormella

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