Knight Falls

When US equities markets opened yesterday a 9:30AM EDT many stocks were more illiquid than usual (the norm for our markets is very little liquidity during the first 30 minutes of trading). On our desk you could hear Bella barking about erratic price behavior and lack of liquidity. We fired off emails to our broker dealer and technology providers trying to ascertain what was going on. The lifeblood of a short term trading desk is liquid markets and without understanding what has occurring it would be extremely difficult to control the risk on our desk.

By 10:00AM we had received word that Knight Trading was having a software malfunction that was causing it to put erroneous orders into the market. We had been tweeting since 9:34 that the price action and orders we were observing made very little sense. It appeared to me in my primary stock HOG that an algo was selling millions of shares without any regard to price.

When I read the news about NITE being the cause of the problem I opined on StockTwits that losses from this glitch might easily eclipse the losses they had suffered during NASDAQ’s errant Facebook IPO. That tweet turned out to be a bit of an understatement with the loss coming in at $440 million and causing them to look for a buyer so they can continue to operate.

NITE has been around since I began trading NASDAQ stocks in early 1996. During my first few years of trading NITE made most of their money by causing internet stocks to open at crazy prices where they would fill their retail orders and pocket millions of dollars. When the internet bubble burst in 2000 and retail demand began to dry up they needed to reinvent themselves to survive. Over time they have become an excellent technology provider for liquidity to US markets. Many of the pro traders I know have migrated over to NITE’s execution algorithm in the past year. But as of tomorrow our broker dealer’s clearing firm will be disconnecting NITE.

If I had to make a bet I would say NITE will find the capital to survive. They are currently executing 11% of the volume in the US equities markets and there is a lot of upside potential for their offerings.

In my next post I will address the wave of attention that computer driven trading has received in the past few years and whether all of the criticism being offered passes muster.