Knight did not have appropriate risk controls in place to prevent the execution of erroneous trades or orders that exceed pre-set credit or capital thresholds, violating the SEC’s Market Access Rule, the regulator said.
On 1 August last year, a software problem at Knight caused four million unintentional orders to flood into the market over a 45-minute period, when attempting to fill just 212 customer orders, the SEC said. Knight traded more than 397m shares and ended up with “several billion dollars” in unwanted positions, which it had to unload at a loss of over $460m.
“These numbers highlight the risks that arise from automated trading, and the immense consequences that errors can have both for the firm itself, and for the market in general,” Daniel Hawke, chief of the SEC Enforcement Division’s market abuse unit.
The trading error forced Jersey City, New Jersey-based Knight to seek investors to help it stay afloat. The firm was later bought by Chicago-based Getco Holding for $1.4bn in a deal that closed in July.
“As trading technology evolves, controls and compliance must keep pace,” Hawke said.
Knight had also failed to conduct adequate reviews of the effectiveness of its controls, the SEC said.
Knight neither admitted nor denied the SEC’s findings.
The settlement was another step in moving beyond the problems Knight had last year, KCG chief executive Daniel Coleman said in a letter to KCG clients.
He said the firm has implemented numerous risk control measures, including automated controls that would shut down trading when predetermined thresholds have been crossed, automated alerts, and an ”Emergency Response Center.”