Knight Capital (KCG) is a US market maker. If it is lucky it might still be in a few weeks. The odds are it is bust (though it denies it) after it lost $440 million after an in-house trading software programme (an algo) went bonkers and made a stupendous number of mad trades which were bound to lose money (buying on the offer and selling on the bid at the same time). Some trades have been unwound. Others cannot be and Knight Capital must pick up the tab. Heck they are only market makers do we have any sympathy? Er…no.
The left will blather on about a failure of regulation, evil casino banking blah blah blah. They rather miss the point, as ever. What Knight Capital did in using an ago to trade was legal and all the regulation in the world and having the late Mother Theresa brought in as COO to instil a new corporate culture could not stop a programme messing up. Knight Capital should shoot its IT department, if it could afford any bullets. It is as simple as that.
As it happens I think the use of algos is a pointless exercise. The banksters argue that they provide liquidity. This is not true since they trade electronically in nano seconds with other software programmes – either other algos or market makers. They are not actually making it easier for you or me to trade. It is one of those paper shuffling exercises which nominally boosts a country’s GDP without actually producing anything useful.
One upon a time the stockmarket was a place where companies went to raise capital to grow real businesses and then to provide a secondary market for investors in order to encourage them to pony up that capital as a long term investment. Today, most market participants (by volume) are not in any way related to that original primary purpose. They are trading over very short time frames often – as with Knight Capital – from machine to machine. Such activity does not actually serve any useful purpose whatsoever.
As such will the world be a worse place if Knight Capital and forms like it go belly up? I doubt it. I have no real sympathy here.
If you enjoyed reading this article from Tom Winnifrith, why not help us cover our running costs with a donation?
Filed under: