Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Saudi Arabia Eyes Total Dominance In Oil And Gas Markets - 7th Jul 20
These Are the Times That Call for Gold - 7th Jul 20
A Reason to be "Extra-Attentive" to Stock Market Sentiment Measures - 7th Jul 20
The Beatings Will Continue Until the Economy Improves - 6th Jul 20
The Corona Economic Depression Is Here - 6th Jul 20
Stock Market Short-term Peaking - 6th Jul 20
Gold’s Major Reversal to Create the “Handle” - 5th July 20
Gold Market Manipulation And The Federal Reserve - 5th July 20
Overclockers UK Custom Build PC Review - 1. Ordering / Stock Issues - 5th July 20
How to Bond With Your Budgie / Parakeet With Morning Song and Dance - 5th July 20
Silver Price Trend Forecast Summer 2020 - 3rd Jul 20
Silver Market Is at a Critical Juncture - 3rd Jul 20
Gold Stocks Breakout Not Confirmed Yet - 3rd Jul 20
Coronavirus Strikes Back. But Force Is Strong With Gold - 3rd Jul 20
Stock Market Russell 2000 Gaps Present Real Targets - 3rd Jul 20
Johnson & Johnson (JNJ) Big Pharma Stock for Machine Learning Life Extension Investing - 2nd Jul 20
All Eyes on Markets to Get a Refreshed Outlook - 2nd Jul 20
The Darkening Clouds on the Stock Market S&P 500 Horizon - 2nd Jul 20
US Fourth Turning Reaches Boiling Point as America Bends its Knee - 2nd Jul 20
After 2nd Quarter Economic Carnage, the Quest for Philippine Recovery - 2nd Jul 20
Gold Completes Another Washout Rotation – Here We Go - 2nd Jul 20
Roosevelt 2.0 and ‘here, hold my beer' - 2nd Jul 20
U.S. Dollar: When Almost Everyone Is Bearish... - 1st Jul 20
Politicians Prepare New Money Drops as US Dollar Weakens - 1st Jul 20
Gold Stocks Still Undervalued - 1st Jul 20
High Premiums in Physical Gold Market: Scam or Supply Crisis? - 1st Jul 20
US Stock Markets Enter Parabolic Price Move - 1st Jul 20
In The Year 2025 If Fiat Currency Can Survive - 30th Jun 20
Gold Likes the IMF Predicting a Deeper Recession - 30th Jun 20
Silver Is Still Cheap For Now - 30th Jun 20
More Stock Market Selling Ahead - 30th Jun 20
Trending Ecommerce Sites in 2020 - 30th Jun 20
Stock Market S&P 500 Approaching the Precipice - 29th Jun 20
APPLE Tech Stock for Investing to Profit from the Machine Learning Mega trend - 29th Jun 20
Student / Gamer Custom System Build June 2020 Proving Impossible - Overclockers UK - 29th Jun 20
US Dollar with Ney and Gann Angles - 29th Jun 20
Europe's Banking Sector: When (and Why) the Rout Really Began - 29th Jun 20
Will People Accept Rampant Inflation? Hell, No! - 29th Jun 20
Gold & Silver Begin The Move To New All-Time Highs - 29th Jun 20
US Stock Market Enters Parabolic Price Move – Be Prepared - 29th Jun 20
Meet BlackRock, the New Great Vampire Squid - 28th Jun 20
Stock Market S&P 500 Approaching a Defining Moment - 28th Jun 20
U.S. Long Bond: Let's Review the "Upward Point of Exhaustion" - 27th Jun 20
Gold, Copper and Silver are Must-own Metals - 27th Jun 20
Why People Have Always Held Gold - 27th Jun 20
Crude Oil Price Meets Key Resistance - 27th Jun 20
INTEL x86 Chip Giant Stock Targets Artificial Intelligence and Quantum Computing for 2020's Growth - 25th Jun 20
Gold’s Long-term Turning Point is Here - 25th Jun 20
Hainan’s ASEAN Future and Dark Clouds Over Hong Kong - 25th Jun 20
Silver Price Trend Analysis - 24th Jun 20
A Stealth Stocks Double Dip or Bear Market Has Started - 24th Jun 20
Trillion-dollar US infrastructure plan will draw in plenty of metal - 24th Jun 20
WARNING: The U.S. Banking System ISN’T as Strong as Advertised - 24th Jun 20
All That Glitters When the World Jitters is Probably Gold - 24th Jun 20
Making Sense of Crude Oil Price Narrow Trading Range - 23rd Jun 20
Elon Musk Mocks Nikola Motors as “Dumb.” Is He Right? - 23rd Jun 20
MICROSOFT Transforming from PC Software to Cloud Services AI, Deep Learning Giant - 23rd Jun 20
Stock Market Decline Resumes - 22nd Jun 20
Excellent Silver Seasonal Buying Opportunity Lies Directly Ahead - 22nd Jun 20
Where is the US Dollar trend headed ? - 22nd Jun 20
Most Shoppers have Stopped Following Supermarket Arrows, is Coughing the New Racism? - 22nd Jun 20

Market Oracle FREE Newsletter

AI Stocks 2020-2035 15 Year Trend Forecast

The Real Story Behind the Knight Capital Trading Fiasco

Companies / Corporate News Aug 07, 2012 - 07:11 AM GMT

By: Money_Morning

Companies

Best Financial Markets Analysis ArticleShah Gilani writes: Oh, you are going to love this.

That whole Knight Capital fiasco last Wednesday, when a software glitch caused them to flood the market with thousands of unintended orders, it ain't exactly what you think it is.

Sure, they tripped over themselves in the dark pool where they were trying to compete.


But somewhat interestingly (okay, a LOT interestingly), the competitor that drove them to "upgrade" their trading software, which malfunctioned and caused them to actually bid-up share prices erroneously and then buy them at inflated prices, was none other than, wait for it...

The New York Stock Exchange.

That's not the whole story, or even the good part. Oh, it gets better. A lot better

Knight claimed a $440 million trading loss on Wednesday resulted from their computer glitches and sunk the company (at least for now; I'll get to that).

Well, according to Nasdaq (this was on its site: nasdaq.com), it wasn't a trading loss at all. Knight paid Goldman Sachs a $440 million fee (commission?) to take the errant shares Knight had bought on Wednesday morning off its hands.

Now, I don't know what Goldman did with those shares, but my guess is they held most of them and sold them on Friday when the market soared a few hundred points. Of course, that's not a "prop" trade. Knight is a customer of Goldman's (it is now...).

But who cares?

Goldman Sachs ripped a customer for a $440 million fee, virtually bankrupting it in the process, flipped the shares it bought from Knight to "help" them (and first of all, probably overly hedged itself... as in enough to be net short... the large stake it holds in Knight's convertible preferred) for a tidy profit, and then probably shorted the stock (before "helping" them, and themselves to their little fee) before the stock collapsed, then probably gave it its "lifeline" (that's a guess, and I'm being sarcastic, but it's possible). And maybe we'll find out where that lifeline Knight got on Friday really came from) before buying a ton of Knight's shares back on Friday before hearing (of course... before) that several big firms were looking at buying Knight.

What's my point in the above LONG sentence? Who cares! That's all business as usual at the Golden Vampire Sachs.

That's after-the-fact stuff.

What's more interesting is why all this happened in the first place.

Here's what you probably don't know...

How Knight Capital Blew Itself Up
Back in July, the NYSE got permission (from the SEC... oh, those guys are good) for a one-year pilot program. The name of the program is... wait for it... the "Retail Liquidity Program."

Are you laughing? You will be.

The Retail Liquidity Program allows the NYSE to transact on the exchange (its Exchange), for the benefit of retail customers only, at better than posted prices.

That's right. If you're a retail investor and you buy or sell a stock on the NYSE, you might get a price better than the bid, if you're selling, and a price better then the offer, if you're buying.

Mind you, it's not much. Maybe one-tenth of a cent. But hey, you know, on your 100 share orders, that adds up to a lot of money. Maybe now you can afford that Rolls Royce.

You didn't know that, did you? And why should you? You wouldn't because YOU don't transact on the NYSE. YOU don't send your orders anywhere.

Here's what's happening behind the scenes...

When you place an order with, say, TD Ameritrade, or Scottrade, or Fidelity, or E*Trade (these are all customers of Knight Capital; I'm getting to that), they "route" your orders to be executed against bids and offers elsewhere. Those bids and offers may be on the NYSE, at some bank (maybe Goldman Sachs), on some market-maker's trading desk (like Knight Capital's desk... they're a market-maker, you know), or in some dark pool, or at some other hole in the system where trades slip into darkness.

Your broker routes your trade for execution to some destination, because he is paid to send it there. That's right; your broker is paid to send your order somewhere, and if it's an NYSE-listed stock, it probably won't even be sent to the NYSE.

That's because the NYSE doesn't pay for "order flow." Oh, wait a minute...

They do now.

Under their Retail Liquidity Program, they can now pay for order flow, kind of. They get orders directed to them by offering a slightly better price on an execution than is posted on their own Exchange.

The idea is that they can't compete with companies like Knight, who pay for order flow (so it never gets to the NYSE) and take the other side of trades or match them off against other order flow in their systems, or other people's systems.

I know this is a little confusing. But here's what you need to know.

This whole "paying for order flow" thing is about collecting as many orders as you can get under your roof. The more orders you see coming your way, the better you know what the bids and offers are out there, the better you can "predict" prices, and the more profitable your trading will be... that is... if you're high frequency trader, or a market-maker... like Knight.

So, the NYSE gets to compete with Knight. And Knight doesn't like that. So, it upgrades its software to jump the NYSE. And it blows up.

Knight's systems (probably "pinging" and looking to influence market prices and initiate trades) sends out orders (I'm speculating here), which end up lifting bids, which ends up triggering Knight to buy shares, which ends up being a huge cluster you-know-what, because it's all a mistake, you know. Which means they own a bunch of stocks they don't have enough capital to hold. Which means Goldman Sachs gets to bend another customer over.

Which means everything is normal on the Street.

You just can't make this stuff up.

Source :http://moneymorning.com/2012/08/07/the-real-story-behind-the-knight-capital-trading-fiasco/

Money Morning/The Money Map Report

©2012 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules