NEW YORK, N.Y. – Financial services company Knight Capital Americas will pay $12 million to settle charges it violated SEC rules in connection with a costly trading glitch in August 2012.
The Securities and Exchange Commission said Wednesday that Knight didn’t have adequate safeguards to limit the risks posed by its access to markets.
Knight Capital Group takes stock trading orders from big brokers like TD Ameritrade and E-Trade. It routes the orders to exchanges including the New York Stock Exchange. On Aug. 1, 2012, a software glitch sent millions of erroneous orders to the New York Stock Exchange. The malfunction caused 45 minutes of volatile trading and a loss of $460 million for Knight, which at the time oversaw trading of 524 stocks on the NYSE.
The SEC said two technology mistakes led to the breakdown. The first occurred in 2005. According to the SEC, a section of code in an automated equity router was moved to an earlier spot in the code sequence. As a result, one of the router’s functions became defective. In July 2012, Knight incorrectly deployed new code in the same router. That triggered the defective function, which couldn’t recognize when orders had been filled.
The SEC said an internal Knight Capital system generated 97 automated emails that referenced the router and identified an error before the markets opened the day of the breakdown, but Knight didn’t act on them. The emails were not alerts, but the SEC said the messages created an opportunity to fix the error.
After the problem was traced to Knight, the company’s shares lost three-fourths of their value in two days. Knight ceded control of its operations on the New York Stock Exchange and rival trading firm Getco was one of the firms that helped bail it out.
Knight and Getco combined to form KCG Holdings Inc. earlier this year.
“We are pleased to put the events that occurred at Knight Capital on August 1, 2012 behind us,” KCG spokeswoman Sophie Sohn wrote in an email. “KCG is committed to employing best-in-class risk management processes.”
KCG Holdings share rose 4 cents to $8.50 in afternoon trading.