Knight Capital Made Billions of Unplanned Trades in Securities After Their Computer Ran Amok – Then Wanted a Do Over

SEC in a Rare Moment of Regulatory Spine Said No

Last week the small securities firm Knight Capital installed new computer programs, and the programs promptly went on a buy spree, purchasing billions of dollars worth of securities that the company did not want to purchase and did not have the money to purchase.  When the securities had to be sold to get money, the firm lost hundreds of millions and is in dire, near death like condition.

Now it turns out the head of the firm called the head of the SEC and asked the SEC to allow the firm to cancel the transactions.  That’s right, the firm wanted to go back on its purchases, apparently claiming that it had the right to do a ‘do over’ since things had not worked out the way they wanted them to.  To its great credit, the head of the SEC said no.

Knight Capital CEO Thomas Joyce
He wants others to pay for his colossal
mistakes  - For Wall Street It's the
American Way

Three hours after a software glitch unleashed a wave of erratic trades on Wednesday, leaving Knight holding at least $4.5 billion worth of securities it hadn't planned to buy, firm Chief Executive Thomas Joyce was on the phone with Mary Schapiro, chairman of the Securities and Exchange Commission.

Mr. Joyce pressed the SEC chief to allow the firm to cancel many of the trades, according to people with knowledge of the discussions.

The conversation helped seal Knight's immediate fate. From her vacation spot in Maine, Ms. Schapiro rejected Mr. Joyce's entreaties, setting in motion the firm's scramble. Knight was forced to unload the stock it had bought, incurring a $440 million loss that depleted the company's capital and left it facing a dire choice: seek a financial lifeline, a buyer, or file for bankruptcy.

Why couldn’t the firm just go back in time and pretend the trades never took place?  Well remember that there are two parties to the trade, a buyer and a seller.  Canceling the trades would have meant taking away the trades that the sellers made in good faith, trades that they were entitled to make.  So no, cancellation should not have been allowed.

But what this incident really reveals is the attitude of Wall Street financial firms.  In their minds if they made a mistake someone else should suffer.  They should be allowed to correct their mistakes even if that imposes a penalty on other parties who played no role in the colossal stupidity of their installation of their faulty computer program. 

It is this sense of entitlement, this sense of expecting to be bailed out, the sense that they have a right to be bailed out and not suffer the consequences of their folly that is so odious here.  And the sad but true fact, the revulsion the rest of us feel towards people who make millions and then want someone else to suffer from their mistakes and to never ever be held accountable will probably never penetrate their thick veneer of entitlement.