Published August 01, 2012
Wall Street was hit by a messy opening on Wednesday due to technology glitches at Knight Capital Group (KCG), causing confusion and shares of the market maker to plunge more than 30% to multiyear lows.
The Securities and Exchange Commission is talking to the New York Stock Exchange over erroneous Knight Capital trades, sources told FOX Business's Charles Gasparino. The SEC and NYSE are examining possible algorithm mishaps and looking into a possible “fat finger” trading error, while Knight told Gasparino it is looking into the trading problems.
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The trading issues prompted Knight Capital to instruct clients to route their trades elsewhere.
“The algos went nuts this morning,” said Joe Saluzzi, co-head of trading at Themis Trading, referring to computer-generated algorithms that control much of equity trading. “Someone has a major, major problem on their hands.”
In a statement, Jersey City, N.J.-based Knight Capital said an initial review "indicates that a technology issue occurred in the company's market-making unit related to the routing of shares" of about 150 NYSE-listed shares. Knight noted that its over the counter securities and trading in other business were not affected.
Wall Street sent shares of Knight Capital plummeting to their lowest level since the summer of 2005 as speculation mounted that the market maker could be on the hook for legal damages if trading glitches forced trades to be executed at unwanted prices.
Depending upon how many broken trades occurred, Knight could face a loss of up to $300 million, a source told Gasparino.
Adding to the concern, credit ratings firm Egan-Jones downgraded Knight Capital to “B” from “B-plus” on Wednesday, citing "operating problems" that are hurting the company.
Shares of Knight Capital, which handles stock trades for many retail brokerage firms, plunged 32.82% to close at $6.94 north of 63 million shares.
“This is another example of a market structure that has failed. Another example how they have ruined the market structure to appease the machines,” said Saluzzi, author of Broken Markets. “The market structure has failed and is losing investor confidence.”
NYSE Euronext’s (NYX) Big Board said earlier that it would review trades on 148 stocks between the market open at 9:30 a.m. ET and 10:15 a.m. ET. It has since cancelled trades for six symbols, including Wizzard Software (WZE), Quicksilver (KWK), E House (EJ), American Reprographics (ARC) and China Cord Blood (CO).
NYSE said its decision is not subject to appeal and was reached in association with regulators after a review early in the day.
“We saw a very similar trend in these stocks. There was a large influx of orders -- both on buy-sides and sell sides -- that was clearly adding volatility to our market,” Jonathan Corpina, senior managing partner at Meridian Equity Partners, told FOX Business.
Corpina, who serves as a floor governor on the floor of the NYSE, said Knight had acknowledged technology problems.
“We’ve got humans down here who use common sense and logic,” Corpina said.
Underscoring the trading issues, Saluzzi pointed to surge in volume of Wells Fargo Capital IX (JWF), preferred shares of the San Francisco banking giant.
“It usually never trades. It traded four million shares!” said Saluzzi.
The volatility comes on a high-profile day for Wall Street, which was anxiously awaiting a pivotal decision from the Federal Reserve on whether or not to provide further monetary stimulus to juice the sagging U.S. economy.
Earlier this month Knight disclosed losses of $35.4 million tied to the bungled May 18 Facebook debut, higher than prior estimates for a loss of $30 million to $35 million. Those trading losses helped fuel a deeper-than-expected 81% plunge in second-quarter earnings at Knight.
Knight has said it is considering its legal options against Nasdaq.
Wall Street remains jittery about trading issues after the 2010 Flash Crash, which caused the Dow Jones Industrial Average to mysteriously plummet more than 1,000 points before quickly rebounding.
U.S. stocks closed modestly lower on Wednesday, with the blue chips losing 33 points and the S&P 500 off 0.29%.