The Knight who fell on his Sword

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technology glitch financial trading
Photo – Stan Honda/AFP/Getty Images


All tragedies in the world have a bittersweet balance. Sometimes a family is hit by a crisis that goes beyond family relations and the conclusion of the story leaves the audience with a touch of melancholy. One side that is always forgotten, however, is the fact that the tragedy has to take place not only complete the story but to make it more poetic and complete. The protagonists have to be sacrificed to lead to a more justified ending and the open ended interpretation of the end is supposed to provide closure. Imagine Romeo and Juliet where they both lived happily ever after. Even though it’s a better delusional setting but I’m afraid to say it doesn’t have the same ring to it.

The same holds in real life as well. It’s truer for the finance world where large institutions and icons of the past have perished spectacularly to aid the system to go forward. Lehmann Brothers, Bear Sterns and now the new one to be added to the list seems like Knight Capital. In 2008, Lehmann Brothers and Bear Sterns became the casualties of the meltdown leading to their demise. And the reason of the fall was because the whole system was following a risky strategy betting on the economy to keep going upwards. When things turned, however, everyone ran for the exits and the last ones out weren’t fortunate enough to make it out alive. The same seems to be coming true of Knight Capital.

There had been signs in the past that the systems in the stock exchange and particularly New York Stock Exchange was prone to glitches as seen in the flash crash of 2010 and then the botched Facebook IPO which saw the system cause chaos on the share price. This time it seems that when the music stopped, Knight Capital got stuck with the piece of paper at the end and by the looks of it might be the filing papers for bankruptcy. According to WSJ, Knight Capital disclosed that the computer-trading glitch would make it lose a stunning $440 million.

The events of Tuesday have shown that how there are still deep issues related to the stock markets and the use of high speed trading and how a small glitch in the system, sustained for a while, can lead to serious implications. The advent of technology has meant that now people can trade in volumes of millions in the blink of an eye by just inputting algorithms into their computers without any traders. That means that the trading floor has now gone from people shouting orders at each other to being handled by a complicated network of computers. The human element, which allowed for problems to be identified in the moment and rectified, has now been eliminated. The experts signal towards being proactive and having controls built in to the systems to avoid the problem altogether in the future.

The issue that is coming through now seems to be that a new system was installed by Knight Capital that sent a huge volume of bogus trades to the brokers leading to the losses that we are seeing now. Analysts are now hoping that with the Knight Capital debacle, the US Securities & Exchange Commission will be pushing for new measures that would force firms to fully test coding changes before their public debut.

The irony of the situation is that Thomas Joyce, the CEO of Knight Capital, was the flag bearer for computer-led trading which has now became the downfall of his own company. Joyce was the champion of carrying out trades through networks cutting out the human element from the trading floors. This strategy allowed him to make profits and gain market competitiveness that he enjoyed for so long. It would not be wrong to say that due to his struggles, market making in the exchanges became a lucrative business for many others to follow through on. Losses till now have totalled at $440 million with Knight Capital losing 75% of its share value in 2 days of trading with bankruptcy being seen on the cards.

As I stated in the beginning, tragedies have a mixed sense of something lost, something won. The beauty of it is that without one, the other can’t be complete. It becomes necessary for it to happen to lead to a more elegiac ending and this case is no different. Knight Capital will have to fall on its own sword to keep the story going. Already the tale of the financial markets is filled with companies falling from grace for the perpetuation of the system and it seems that they will become part of the history as well. They will become a name to be recorded in the archives for later but their fall will become a lesson for many more on what not to do again.

In the words of Jean Racine “A tragedy need not have blood and death; it’s enough that it all be filled with that majestic sadness that is the pleasure of tragedy.”

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