SEC Begins Formal Inquiry Into Knight Capital's $457.6m Computer Error

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Knight Capital's $457.6m trading error in August is the subject of a formal investigation by the Securities and Exchange Commission.

Bloomberg reports that federal examiners are assessing the firm’s compliance with a rule governing risk-control procedures in its trading operation and other regulations, the company said in a filing with the commission yesterday. Knight was also the subject of on-site examinations into its capital and liquidity conditions, it said. Those inquiries have concluded.

The trading mishap, which Knight blamed on faulty software, pushed the Jersey City, New Jersey-based firm to the brink of bankruptcy and accelerated an industrywide assessment of how to improve controls in electronic trading systems. SEC Chairman Mary Schapiro described the mishap as 'unacceptable' and promised to issue regulations to help prevent similar events.

'It was expected that the SEC would look into Knight’s operations', Richard Repetto, a New York-based analyst at Sandler O’Neill & Partners LP, said in a phone interview. 'There are rules in place that would presumably prevent these mishaps, but then again human errors do occur'.

The SEC is examining Knight’s compliance with the so-called market-access rule, adopted in 2010 to reduce the risk of trading disruptions and improper and manipulative activity. The rule, which went into effect last year, requires brokers to employ risk checks on orders before they’re sent to markets to make sure they aren’t erroneous and don’t exceed preset capital and credit levels.

Hit the link below to access the complete Bloomberg article:

SEC Begins Formal Inquiry Into Knight Related to Computer Error

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