2012 stock trading disruption
On August 1, 2012, Knight Capital caused a major stock market disruption leading to a large trading loss for the company. The incident happened after a technician forgot to copy the new Retail Liquidity Program (RLP) code to one of the eight SMARS computer servers, which was Knight's automated routing system for equity orders. RLP code repurposed a flag that was formerly used to activate an old function known as 'Power Peg'. Orders sent with the repurposed flag to the eighth server triggered the defective Power Peg code still present on that server.[12] This function executed blocks of a stock trade, halting when it recorded that enough orders were fulfilled. However, the code to report back the fulfillment of orders had been altered after the deprecation of "Power Peg", resulting in the order never being recorded as completed. As a result, the server would send out orders indefinitely.[12]
When released into production, Knight's trading activities caused a major disruption in the prices of 148 companies listed at the New York Stock Exchange. For example, shares of Wizzard Software Corporation went from $3.50 to $14.76. For the 212 incoming parent orders that were processed by the defective Power Peg code, Knight Capital sent millions of child orders, resulting in 4 million executions in 154 stocks for more than 397 million shares in approximately 45 minutes.[12]
Knight Capital took a pre-tax loss of $440 million. This caused Knight Capital's stock price to collapse, sending shares lower by over 70% from before the announcement. The nature of the Knight Capital's unusual trading activity was described as a "technology breakdown".[13][14]
On August 5, the company raised around $400 million from half a dozen investors led by Jefferies in an attempt to stay in business after the trading error. Jefferies CEO Richard Handler and Executive Committee Chair Brian Friedman structured and led the rescue and Jefferies purchased $125 million of the $400 million investment and became Knight's largest shareholder.[15] The financing would be in the form of convertible securities, bonds that turn into equity in the company at a fixed price in the future.[16]
The incident was embarrassing for Knight CEO Thomas Joyce, who was an outspoken critic of Nasdaq's handling of Facebook's IPO.[17] On the same day the company's stock plunged 33 percent, to $3.39; by the next day 75 percent of Knight's equity value had been erased.[18]
