Knight Capital: The $440 Million Software Glitch of August 2012

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On the morning of August 1, 2012, Knight Capital Group was the largest trader in U.S. equities, handling more than $21 billion a day and holding about 17 percent of volume on both the New York Stock Exchange and the Nasdaq. Forty-five minutes after the opening bell it had lost $440 million. This episode reconstructs how a routine software update, copied by hand to seven of eight servers, destroyed a firm founded in 1995 and built over 17 years.

The cause was old code nobody had deleted. To support a new NYSE retail liquidity program, engineers reused a flag once tied to Power Peg, a retired algorithm still sitting in the SMARS order router. On the one server that missed the update, the flag woke Power Peg with its trade-counting logic disconnected, so it kept firing orders without knowing they had filled. The episode also covers the firm's history of fines and the weekend scramble to save it.

The rogue server executed four million trades in 154 stocks, more than 397 million shares, buying at the ask and selling at the bid. Wizard Software jumped from $3.50 to $14.76.
Knight had prior regulatory trouble, including a $79 million settlement in 2004 for overcharging institutional customers and accusations of spoofing.
Its stock fell 33 percent that day and traded at $3.39 by August 2, erasing 75 percent of the company's market value.
CEO Thomas Joyce had publicly blasted Nasdaq months earlier over the technical failures in Facebook's IPO.
A consortium led by Jefferies put up $400 million in convertible securities, with Jefferies supplying $125 million. Knight was acquired by Getco in December 2012, and the merged firm became KCG Holdings in July 2013.

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