Knight Capital has reached a $12 million settlement with US regulators over a technology meltdown which caused market chaos and drove the firm to the brink of bankruptcy.
On 1 August last year, a bungled software update affected Knight's algorithms and sent prices in more than 140 stocks haywire, costing the market maker $460 million. The firm was saved from bankruptcy by a group of investors and later merged with Getco.
A Securities and Exchange Commission investigation has found that the company failed to have adequate safeguards in place to limit risks, violating its market access rule.
The SEC highlights "two critical technology missteps" that contributed to the chaos. The first problem dated back to 2005, when a section of code in an automated equity router was moved.
Seven years later Knight deployed new code in the same router, sending it haywire. During the first 45 minutes after the opening bell on 1 August, the router sent more than four million orders into the market when attempting to fill just 212 customer orders.
Knight consequently traded more than 397 million shares, acquired several billion dollars in unwanted positions, and eventually suffered a loss of more than $460 million.
The second IT misstep saw Knight fail to pick up on a warning before the erroneous trades were made. Nearly 100 automated e-mails were sent out identifying the router error before markets opened on 1 August but were not acted on.
Daniel Hawke, chief, enforcement division's market abuse unit, SEC, says: "Brokers and dealers must look at each component in each of their systems and ask themselves what would happen if the component malfunctions and what safety nets are in place to limit the harm it could cause. Knight Capital's failure to ask these questions had catastrophic consequences."
In addition to the $12 million fine, Knight - without admitting or denying the findings - agreed to retain an independent consultant to conduct a comprehensive review of controls and procedures.