Knight Capital CEO expects new rules to avoid trading glitches
Knight Capital Group Inc.’s chief executive expects regulators to impose new rules in the wake of his firm’s nearly fatal computer-trading glitch, but that the financial system will be stronger.
“We paid a big price for a better outcome,” Tom Joyce, who is also Knight’s chairman, told a Barclays financial services conference in New York.
Knight’s trading debacle showed how operational risk, not “regulatory risk,” is the biggest threat facing firms as stock trading has become faster and more computerized, Joyce said.
Knight will soon announce the appointment of a new risk officer, he added.
On Aug. 1, newly installed trading software at Knight accidentally sent a slew of errant trades into the stock market, costing the firm $440 million. Knight, a New Jersey brokerage and a major behind-the-scenes force on Wall Street, needed rescue financing to stave off collapse.
At the conference Tuesday, Joyce blamed the faulty trading on software that was somehow activated when the new trading program went live. “In effect, we kicked the beehive,” he said.
The Securities and Exchange Commission is investigating the trading meltdown.
Joyce expects regulators to focus on rules that would cut off trading in stocks amid unusually heavy trading, known as volume circuit breakers. He also expects regulators will review rules governing when Wall Street firms can undo erroneous trades.
“There’s no reason to put a firm at risk because some knucklehead or series of knuckleheads at the firm made a big mistake,” Joyce said. “If it was an error, you should be able to fix an error.”
New regulations could also require a “kill switch” that could abort runaway computer trading algorithms before they do too much damage. But Joyce said a kill switch should not shut down an entire firm if there’s a problem in only one trading area.
“There are things you need to make sure you take into consideration before you just hit the big red button,” he said.
