In its order, the SEC detailed technology missteps that it said led Knight Capital’s computers to send more than 4 million trading orders to fill only 212 customer requests. The firm, which was purchased by Getco Holding this year, did not admit or deny wrongdoing. Knight Capital’s new owner reached the deal with the SEC.
The SEC did not charge any individuals with wrongdoing. Andrew Ceresney, co-director of the agency’s enforcement division, told reporters in a conference call that his investigators determined “it was not appropriate to hold particular individuals responsible” in this case.
The Knight Capital fiasco was one of several major technology failures to wreak havoc in the market in recent years. On May 6, 2010, the stock market plunged nearly 1,000 points in minutes and then bounced back up, an event that came to be known as the “flash crash.”
In response to that scare, the SEC adopted a regulation that required trading firms with direct access to U.S. exchanges to adopt controls that would guard against erroneous trades. The settlement involving Knight Capital marks the first time that the SEC took an enforcement action under that regulation, known as the market access rule.
Ceresney said the market access rule will be “an important area of enforcement going forward.” But he declined to say if the agency is currently investigating more firms for similar lapses.
As for Knight Capital, SEC officials steered away from calling the technology problem a “glitch,” choosing instead to identify it as a failure that could have been avoided.
“Where the systems are not reasonably designed and where there’s limited risk mitigation, then the problem goes from being a glitch to being something that was foreseeable,” said Daniel Hawke, chief of the SEC’s market abuse unit.
The agency said previous technology mishaps at Knight Capital gave the trading firm an opportunity to reassess its controls, but it did not do so in a meaningful way.
SEC officials also said that e-mails to Knight Capital personnel flagged problems with the computer code before the market opened on Aug. 1, 2012, but the trading firm ignored the warnings.
Knight Capital also failed to adopt procedures that would have directed its employees how to respond to such a problem, the officials said. Instead, the firm identified and fixed the issues in real time, while trades were occurring.
“We are pleased to put the events that occurred at Knight Capital on August 1, 2012 behind us,” Sophie Sohn, spokeswoman for KCG, the company formed after Getco’s acquisition of Knight Capital, said in a written statement. “KCG is committed to employing best-in-class risk management processes.”
SEC Chairman Mary Jo White has pledged that her agency would keep a watchful eye on high-speed, high-tech trading so it can “wisely and optimally” regulate the markets.
In a recent speech, White also said that the controls required by the market access rule are critically important. But she acknowledged that continued technology failures in the marketplace suggest that more work needs to be done.
Recently, a software malfunction led Nasdaq to halt trading for most of the afternoon of Aug. 22. Last month, trading on the nation’s options exchanges was briefly interrupted because of problems with a software system administered by the New York Stock Exchange.