Small Wall St stock brokerage Knight Capital turned on their brand new computer trading program Wednesday. Something went wrong and the computer managed to loose $440 million dollars by quitting time. This nearly put Knight out of business. They only had $365 million cash on hand. According to the Wall St Journal, Knight did a lot of telephoning and a lot of hands and knees work and Goldman Sachs bailed them out. Sort of. As of Friday night Knight was still scrambling to borrow enough money to stay in business.
Wow! Pretty good work for a mere computer program. And what are those programmers doing right now? They ought to be going underground and fleeing the country. There has gotta be one humungous lawsuit coming out of this fiasco.
It's not clear just what the program was doing. The Journal describes the program as something cooked up by, or at least with the support of, the New York Stock Exchange. It was supposed to allow trades to be executed with prices in fractions of a penny. Just why anyone would want to do that is unclear. A penny ain't worth much and a fraction of a penny is pretty close to worthless. Unless you are trading millions of shares.
The program probably was doing, and bungling, "high speed trading". This exercise in capital allocation looks at stock prices and buys rising stocks and sells falling stocks. It's fast enough to detect the instant a rising stock starts to fall and bang out sell orders faster than a plain old human broker.
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