August 7, 2012

Perhaps They Should Have Tested More - Knight Capital

Perhaps Knight Capital Should Have Tested More

Last Wednesday, Knight Capital rolled out a change to its trading software. It contained bugs that caused unauthorized offers to buy and sell shares. Knight had to sell stocks that it accidentally bought - causing a $440 million loss. They considered filing for bankruptcy, but eventually settled on a painful rescue plan. copyrightjoestrazzere
  • A technology error that occurred when the firm unveiled new trading software
  • Chaos ensued
  • Unauthorized trades were made
  • Knight was left holding at least $4.5 billion worth of securities it hadn't planned to buy
  • Loss of $440 Million when they were sold
  • Considered filing Chapter 11 bankruptcy
  • Agreed to allow investors to purchase $400 Million of its stock at about $1.50 a piece, after trading over $10 the prior week
  • Rescue deal will hugely dilute existing shareholders
  • Firm's market-making responsibilities have been temporarily reassigned
  • SEC is examining the company for potential legal violations

Perhaps Knight Capital should have tested more.

According to Reuters, "Wall Street banks and brokers are poring over their trading systems and rethinking the way they test software to make sure they don't become the next Knight Capital Group". That sounds good.

And yet, as written in Smart Money, "These kinds of mistakes can happen to anyone," said James Angel, associate professor at Georgetown University's McDonough School of Business.

An analysis by Nanex Research concludes that a test program was accidentally released into production:
"We believe Knight accidentally released the test software they used to verify that their market making software functioned properly, into NYSE's live system."

This article originally appeared in my blog: All Things Quality
My name is Joe Strazzere and I'm currently a Director of Quality Assurance.
I like to lead, to test, and occasionally to write about leading and testing.
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