Knight Capital Has a Basic Computer Error Which Probably Wipes Out the Firm

Maybe People This Stupid Have No Business in Finance

Like everyone else The Dismal Political Economist has never heard of securities trading firm called Knight Capital, based in New Jersey.  But the firm has made news when its computer software did a truly amazing thing.

The problem on Wednesday led the firm’s computers to rapidly buy and sell millions of shares in over a hundred stocks for about 45 minutes after the markets opened. Those trades pushed the value of many stocks up, and the company’s losses appear to have occurred when it had to sell the overvalued shares back into the market at a lower price.

The company said the problems happened because of new trading software that had been installed. 

That’s right, the firm’s computers issued order to buy millions of shares of stock in various companies, pushing up the price of those stocks.  Then the company had to sell those shares pushing down the prices of the stocks.  The result

The losses are threatening the stability of the firm, which is based in Jersey City. In its statement, Knight Capital said its capital base, the money it uses to conduct its business, had been “severely impacted” by the event and that it was “actively pursuing its strategic and financing alternatives.”

The losses are greater than the company’s revenue in the second quarter of this year, when it brought in $289 million.

While we would like to sympathize with the shareholders and management of the company, the message here is pretty clear.  If you are not smart enough to prevent this sort of thing don’t you deserve what you get?  We think the answer to that question is ‘yes’ but we may want to consult our computer program first to get a really accurate answer.