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Cost of glitch for Knight Capital: $440 million

Knight Capital shares lost 70 percent of their value after a trading software problem, the firm acknowledged.
Knight Capital shares lost 70 percent of their value after a trading software problem, the firm acknowledged.Brendan McDermid/Reuters

The trading firm Knight Capital recently rushed to develop a computer program so it could take advantage of a new Wall Street venue for trading stocks.

But the firm missed its deadline and failed to fully work out the kinks in its system, according to people briefed on the matter. In its debut Wednesday, the software went awry, swamping the stock market with errant trades and putting Knight’s future in jeopardy.

The third stock trading debacle in the last five months revived calls for bolder changes to a computer-driven market that hobbled by its own complexity. Among the proposals that gained momentum were a transaction tax that could reduce trading and stringent testing of computer trading programs.


In the industry, there was a widespread recognition that the markets have become more dangerous that even specialists realized.

‘‘What is starting to become clear is that the costs in terms of these random shocks to the system are occurring in ways that people never anticipated,’’ said Henry Hu, a former official at the Securities and Exchange Commission and a professor at the University of Texas.

Knight lost three-quarters of its market value in the last two days, in addition to losing $440 million from the errant trades, and was scrambling to find financing or a new owner.

While the turbulence on Wednesday hit scores of individual stocks, the broader market took the spasm in stride, closing down less than 1 percent on Wednesday and Thursday. The SEC, which has opened an investigation into potential legal violations at Knight, said it whether any additional steps may be necessary.

Some SEC officials are pushingnew measures that wouldforce firms to fully test coding changes before their public debut, according to a government official who spoke on the condition of anonymity. While the idea has long beendiscussed at the agency, it gained traction after the Knight debacle.


The SEC applied limited safeguards on trading after the ‘‘flash crash’’ of 2010 sent the broader market plummeting in a matter of minutes. But big investors like T. Rowe Price, members of Congress, and former regulators said Thursday that the SEC and the industry have been too complacent and need to do more to understand and control the supercharged market.

“Things are happening far too regularly,’’ said Ed Ditmire, an analyst at Macquarie Securities.

Arthur Levitt Jr., a former chairman of the SEC, said that recent events ‘‘have scared the hell out of investors’’ and called for the agency to hold hearings.

“I believe this latest event was handled better than the flash crash, but the larger question is whether our markets are adequate to deal with the technology that is out there,’’ Levitt said. ‘‘I don’t think they are.’’