Back on Monday, Knight Capital Group was a billion dollar firm that was a leader in the electronic execution of trades – the stuff that replaced all those humans shouting in New York City that you’re still accustomed to when you think of Wall Street. It was responsible for 17.3% of all trades on the New York Stock Exchange and 16.9% on the Nasdaq. Profits for the company hummed along nicely as well – it had a net income over $115 million in 2011.
The company didn’t have the nicest of times in July. The much-hyped initial public offering of Facebook, and subsequent crash of the stock, cost Knight Capital $35.4 million. When you’re a company that has a net income of $115 million, taking a 30% or more hit on one deal makes for a pretty bad day. In a way though, it’s the nature of the beast. Quite literally and harshly, these things happen. Besides, there’s plenty more money to be made over the longer term in electronic trading. High-frequency trading and the computers, programs, and algorithms that power it all are where the money is really at, anyhow.
Then the 1st of August came. Stocks opened at 9:30am, like they always do, and someone at Knight Capital pushed a button. Within the next 30 – 40 minutes, Knight Capital would be all but financially destroyed.