Knight Capital shares stabilise after costly IT glitch

Shares in trading firm Knight Capital have stabilised after falling by three-quarters over the past two days.

The company's value plummeted after an IT glitch on Wednesday caused its trading to go haywire, resulting in major volatility in some US stocks.

The firm, which is a major market-maker on the New York Stock Exchange (NYSE), said it had lost $440m (£280m).

Knight's shares jumped 25% in early Friday trading to $3.25, still down more than two-thirds for the week.

The rebound was prompted by a report in the Wall Street Journal that the firm had secured a credit line to keep it operating for the day while it put its affairs in order.

Knight receives and carries out buy and sell orders on the NYSE on behalf of clients.

However, two major clients: Vanguard and Fidelity, both of whom run major brokerage firms that place ordinary customers' orders with market makers such as Knight, said they would continue to steer clear of Knight for the time being.

A series of unusual swings in certain stocks on Wednesday prompted the NYSE to conduct an investigation into "irregular trading".

The stock exchange identified 140 stocks with higher-than-normal trading volumes, including popular stocks such as Citigroup and American Airlines.

It decided to cancel trades, above or below certain prices, on only six of them:

"This decision is not subject to appeal," it added.

Knight Capital said that a faulty upgrade to its trading software had caused numerous erroneous trades to be sent.

It is thought that the firm racked up its loss, equivalent to half of the value of its equity recorded in its financial accounts, in the space of just a few minutes.

The software glitch is thought to have affected Knight's trading algorithms, which are computer programmes that automatically and speedily send out buy and sell orders based on market data and client requests.

The volatility in share prices caused by the glitch brought back memories of the "flash crash" of 2010, when the Dow Jones Industrial Average fell 10% in just minutes.

The 700-point sudden share crash in US stocks in May 2010 was caused by a single trader's computer programme, according to the US trading watchdog, the Securities and Exchange Commission (SEC).

There have been a number of smaller such incidents since the flash crash, according to Professor Dave Cliff, a computer science specialist at Bristol University who is advising the UK government on the future of computer trading in the financial markets.

"The increased power of computers and the ongoing reduction in their cost means that it is possible to programme a computer system that can do the job of a human trader, and indeed do it much, much faster," he told BBC Radio 4's World at One programme.

There are estimates that 60% of trades on major stock exchanges such as the NYSE are conducted by computers on at least one side of the transaction, he said, and perhaps 40% of them with computers on both sides.

According to Professor Cliff, the problem was that, even if a particular trading firm was confident that its own computer system was reliable and safe in isolation, it could not know how it might interact with other firms' automated systems until it was already up and running.

"We are relying in the markets on technology that is risky in the sense that it is not very well understood," he said.