On the morning of Aug. 1 2012, Knight Capital, Wall Street’s biggest trading firm, sent out a wave of accidental stock orders â€" more than 4 million â€" that reverberated through the market and eventually resulted in a $460 million loss for the firm.
The mistake nearly pushed the Knight Capital into bankruptcy and set off an investigation by the Securities and Exchange Commission. On Wednesday, Knight Capital agreed to pay a $12 million fine to settle charges that it violated trading rules by failing to put adequate safeguards in place to prevent the barrage of erroneous stock orders.
Knight Capital, which was recently acquired by the high-frequency trading firm Getco for $1.4 billion, has neither admitted nor denied wrongdoing.
The fine marked the first time that the Securities and Exchange Commission has used a new so-called market access rule against a trading firm.The rule was adopted in 2010 and requires brokers and dealers with direct access to American exchanges to put controls in place to respond to unexpected market failures.
“The market access rule is essential for protecting the markets, and Knight Capital’s violation put both the firm and the markets at risk,†Andrew Ceresney, co-director of the S.E.C.’s enforcement division, said on Wednesday.
The S.E.C.’s action could signal more enforcement to come under the new leadership of Mary Jo White, the regulator’s chairwoman. Mr. Ceresney warned on Wednesday that the S.E.C. would enforce the new rule “vigorously.â€
The case, which involves the complicated codes and systems used by automated trading firms, has taken the market regulator more than 14 months to investigate.
The S.E.C.’s original investigation into the trading incident was small in scope, according to lawyers briefed on the case. It was not until a whistle-blower stepped forward with a tip under a new whistle-blower program that the agency was able to expand its investigation, these lawyers told The New York Times earlier this year.
When asked about whether the regulator’s investigation was aided by any tips from a whistle-blower on Wednesday, Mr. Ceresney said the S.E.C. did not comment on such issues.
The S.E.C. blamed two “technology missteps†for the trading fiasco on Aug. 1. It contends that Knight Capital failed to remove a defective function in one of its routers that was used to execute orders that day. This resulted in a barrage of erroneous stock orders, instead of just the 212 customer orders it intended to execute. More than 397 million shares were traded and Knight Capital acquired several billion dollars in positions.
The regulator also contends that an automated e-mail identifying the error ahead of the market opening on Aug.1 was sent to a group of employees. While these messages were not intended to be alerts, they provided a chance for the firm to fix the problem.
Knight Capital is not the first technology firm to disrupt the markets after a technology bungle. The S.E.C.’s market access rule stems from an earlier incident referred to as the “flash crash.†On May 6, 2010, the stock market was taken for a roller coaster ride, plunging nearly 1,000 points in the matter of a few minutes before springing back up.
This “flash crash†prompted the S.E.C. to create new rules to ensure market makers have controls in place.
The market access rule could be used to enforce fines in similar cases as the number of technology glitches by trading firms continues to grow. In August, a technological problem shut down trading on the Nasdaq for three hours.
