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Knight Capital’s Software Glitch Costs it $440 Million

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Wild stock price swings in the market yesterday are costing one trading firm a multimillion dollar headache today. Financial services company Knight Capital Group (KCG) has seen its stock price plummet another 50% today after announcing losses incurred due to erroneous trades entered on Wednesday morning. Nearly 150 stocks that trade on the New York Stock Exchange (NYX) experienced extreme price swings and unusually high volume due to the firm's computerized trades. Knight had to unwind the positions that it accidentally bought, causing the firm to take an estimated loss of $440 million --more than the company's second quarter revenue. Knight blames a faulty software installation for the mistake which has since been corrected. The entire event, which lasted for about 30 minutes, ended up costing the company roughly $10 million a minute.

The immediate reaction is to fret over another blow to the confidence of retail investors. Knight's blunder is being compared to the Facebook (FB) IPO and the Flash Crash of May 2010. But these comparisons wildly overstate what happened yesterday. Knight messed up and caused disturbing dislocations and huge volume spikes, but the key difference is that the problem was almost immediately identified and contained. Within an hour order had been restored.

Knight has been harshly punished for its mishap. The company lost over 30% of its value on Wednesday, another 50% today, and has been forced go hat-in-hand in search of a cash infusion or acquirer. Knight Capital is fighting for its survival. There isn't a regulatory body on earth capable of meting out justice with such merciless efficiency.

Markets need outside regulation. Left to their own devices traders will find the weakest participant and steal them blind. There are a million different reasons to be suspicious of equities, traders, banks, the exchanges and the largely impotent regulatory body attempting to police the entire marketplace. Rules are going to be manipulated and abused anywhere there's competition. There's a reason regulators exist, just as there's a reason they test for drugs at the Olympics; people break rules to win.

Knight's mistake and the fallout is, if anything, evidence of what's right about the free market; not a reason to be even more afraid.

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