I will remember today as the day the firm that trained me, gave me my first shot on wall street, three years of opportunity and a lifetime of memories, potentially began a quick descent into non-existence. Now I might know how the alumni of Bear Stearns, Lehman, and Merrill Lynch felt when they could no longer feel proud of the achievement of having fought and won a spot at a prestigious firm out of college. Those folks will always see the name of their firm at the bottom of the work experience portion of their CV as kind of embarrassment or taint they have to shrug off in conversation because their firms no longer exist and are associated with the financial meltdown of 2002. I used to market myself with the distinction of having been selected to the training program for the biggest stock trading company in the world (which it was, possibly until today), now, I'm not so sure that's going to be my game plan.
August 1st, Big "technical issue"
August 2nd (today) Big decline in stock price, like huge.
Knight may be just be a decade and a half old, certainly had its share of mutants in its NJ based office, has had some of the ugliest black eyes in history in terms of trading compliance fines over the years, but the firm was revolutionarily aligned with technology very early in the game, it never took a dollar from the government, and besides a small separately branded asset management business for rich folks and instutitions, the core trading biz never handled individuals' money. That means when they lost
US$440mln yesterday trading and are scrambling for capital to survive, it really doesn't affect you unless you owned their stock, or work there. You can probably count on two hands the people that were "wiped out" today. Yes, when a "human error" causes massive volatility in a basket of stocks like yesterday, there are some scary moments, but trust me when I tell you, there are machines deployed by hedge funds armed at all times to capture this level of disaster and profit from it, and they certainly did yesterday, because they always do, and, so the stocks negatively affected will usually recover back most of their temporary losses. Yes, some innocent civilians may have pushed the panic sell button in their own accounts while the securities tanked and lost big dough, but again, very limited.
Knight Securities was formed in 1995 by pilgrims of a firm called Spear Leads and Kellogg, which was later acquired by the giant vampire squid. The founder of NITE, a dude named Kenny, decided that it would be a good idea to give equity in his new venture to a "roundtable" (that's why it's called Knight) of these newfangled dot.coms called Online Brokers who "gave away" zillions of their customers orders to wholesalers like SLK. Wholesalers like Knight would take the other side of these orders, which were so profitable, the online brokers actually got paid for them! It was called "the rebate". Knight built a massive trading business around this forward thinking idea by partnering with the online brokers who sold their equity in NITE during the turn of the century for a nice chunk of change. Knight brought electronic trading on board early in the game, automating their order flows when no one else did, but since then has always fought to maintain relevancy (sounds like Yahoo!, I know right?). As the aughts ended, Knight had really branded itself as the trusted high touch (which means human mouth to phone to human ear) firm on the street. That was their value-add, they were full service and they really listened to their clients.
The first really public crack in the "human" armor at Knight occurred about five months after I left, in 2002, when a trader sold their own stock down to 0.10 by accident one morning. Their stock story hasn't been very exciting since those days. People can lose trust in a trading company quickly when errors so egregious can happen at any time with no other revenue lines to make up for losses to both P&L and reputation. What happened today (ten years later) is but a fraction of the damage done to the public after the "flash crash"of May 2010 which was facilitated by a firm in the midwest that actually does handle customer money. Like all large trading houses on wall street, Knight has a "portfolio trading group" that handles large and complicated orders from large and complicated institutional clients which involve trading lots of stocks at the same time and receiving a commission or sometimes these days no commission just to have volumes/liquidity to attract other paying clients. Scores of humans code these computer algorithms and test them. One human pushes the button to start the machine on game day. There is no launch code. There is no physical key to be turned, no red button pressed. There was probably a green button clicked called "start" yesterday... and then there was mayhem.
On several occasions during my tenure as a high touch trader, a human error occurred during the normal course of trading that was absolutely 100% my fault. It happens at every single broker and asset manager on the street, of every asset class, and eventually to each and every trader. A material error is really the worst feeling any professional can feel, you have to trust me it goes way beyond the terror of possibly getting fired (it takes a massively costly error to get fired on wall street, because it's just part of the cost of doing business.) The brutal emotional payload includes the anxiety of explaining what you just did to your boss who you most likely hate, to the client who's order in that security you just destroyed... taking their chances of doing what they wanted to do with it in the first place down the drain for at least that day, to knowing your bonus just went down at least 10% (your monthly output just went negative), and good old self-bashing disbelief that you could have been so careless. When an error occurs, everyone on the desk knows immediately. But unless it's firm annihilation (today might be one of the only few actual occurrences of that), most other traders are actually relieved in a perversely shadenfreudian way, sure their team mate lost the firm (your bonus pool) tens of thousands of dollars, maybe hundreds, and blew themselves up, but it was them and not you- and you know it could just as easily have been you. As Todd Harrison of Minyanville wrote in his memoirs that 'when an error happens, you know who your true friends are.' Turns out you usually don't have that many.
For the bloke who is "responsible" for clicking "start" yesterday, this will be impossible to forget, but very possible to move on from emotionally. He or she has nothing to be ashamed of. They were in the seat because the firm wanted them there in the first place, and the event of an error of this magnitude was probably less statistically remarkable than we think with the increasing size of these monster program trades. Basket trading is still in high gear, and the client wants it done seamlessly, quickly and cheaply. It's super competitive to get those orders. Just like an individual trader on a desk, Tuesday's glitch could have happened anywhere- it's just that Knight doesn't have many other revenue channels.
Knight's clients are scattering according to news reports. The firm that got its start with innovation and adaptation may have lost its human touch forever.
All ideas, opinions, expressed or implied herein, are for informational use only and should not be construed as financial product advice or an inducement or instruction to invest, trade, and/or speculate in the markets. Any action or refraining from action; investments, trades, and/or speculations made in light of the opinion expressed or implied herein, are committed at your own risk an consequence, financial or otherwise. I do not possess any nonpublic information regarding the technical issues that occurred at Knight Capital Group (KCG) on August 1, 2012. None of the content above referring to hedge funds refers to any of my past employers. I have no personal trading position in KCG and I wish my former colleagues and firm the best possible outcome.
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