The Securities and Exchange Commission has begun to investigate the $457.6 million trading mistake that nearly took under market maker Knight Capital Group in August.
The market maker, in a quarterly filing Friday acknowledged that its flood of erroneous orders on August 1 and the company’s recapitalization on August 6 “are the subject of regulatory investigations.”
The Jersey City firm, which also experienced unrelated downtime due to a power failure after Hurricane Sandy swept through the New York City metropolitan area two weeks ago, said the firm has also been named in two “putative class actions” and has received several demands for producing books and records related to the incident.
The company said it expects to incur “additional expenses in defending against litigation” and cooperating with the investigations.
The company said it included a loss of $457.6 million related to the August 1 “technology issue,’’ in its market making revenues for the quarter ended September 30.
The company also took a charge of $3.5 million for “professional fees” due to the trading mistake, which chief executive Thomas Joyce has pinned on a “large software bug” in compute code that the company installed in preparation for the launch on August 1 of a new program for retail investors by the New York Stock Exchange.
The SEC convened a market stability roundtable in October to try and surface means of identifying and preventing technical errors such as the Knight problem which disrupt trading.
Among the countermeasures proposed are “kill switches” that the nation’s exchanges would turn on when activity blew past certain pre-set thresholds.
Knight’s shareholders gave up 70% of their equity in the firm, in the August 6 recapitalization. The firm was rescued by fresh investments from a series of industry firms, led by Jefferies & Co.
