The right kind of mess up

US securities broker Knight Capital escaped bankruptcy this week. Due to a software error, Knight’s computer systems randomly generated buy orders for the shares of major companies, including Ford and Bank of America. The glitch lasted 45 minutes and generated a $440m loss for Knight. That put the company, one of America’s largest brokers, at risk of collapse.

However, a rescue package led by competitors Jefferies, Blackstone and TD Ameritrade, has kept it afloat. The deal, which hands 73% of Knight’s ownership to its rivals, significantly dilutes existing shareholders.

What the commentators said:

This is “the best disaster and recovery Wall Street has seen in a long time”, said Halah Touryalai on Forbes.com. If a financial institution is “going to mess up”, then this is how to do it – “without hurting clients and… getting taxpayers involved”.

Wall Street’s “latest Knightmare is different” from other recent disasters such as MF Global and Peregrine, agreed Francesco Guerrera in The Wall Street Journal. Knight’s failure didn’t “threaten the financial system”, so there was “no question” of a bail-out.

Still, “computer-inspired disasters are happening too often”, particularly in the US, says Nils Pratley in The Guardian. The botched Facebook flotation lost UBS $356m and in the “flash crash” last year the Dow Jones lost $1trn of value “in half an hour” while major companies’ share prices “plunged to almost zero”. Ideally, the Knight debacle should spur efforts to design a “reliable circuit breaker… but that may be wishful thinking.”


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