In a scenario that highlights some of the dangers in automated systems, trading firm Knight Capital Group suffered a massive loss earlier this week when the trading software – which the company has been advocating – went slightly nuts for 45 minutes. It bought up every stock in sight, shifting the market in the process, but the company was forced to sell the unwanted shares back at a lower price than it was purchased for.
The resulting loss suffered by the company totaled some $440 million, more than four times Knight Capital’s profits from 2011, and the company’s ability to do business has been impaired. Consulting firm KOR Trading’s founder said on Thursday “With the events of yesterday, you have to question if this is the beginning of the end for Knight.”
Stock trading is especially susceptible to computer errors having large ramifications, where faults could destabilise entire markets or cause a single company a lot of grief. Andrew Haldane, executive director for financial stability at the Bank of England, speaking about HFT (High Frequency Trading) firms last year said that these companies are in a “race to zero” that can cause massive stock crashes.