Risk register · entry
Q3 · EngineeredKnight Capital
Dead code from 2003 woke on the one server they forgot to update, then traded for 45 minutes.
Tightly coupled systems where one small fault cascades and takes down the whole machine.
Why this room
A tightly coupled order-routing system (SMARS) was deployed manually to eight production servers; one server did not receive the new Retail Liquidity Program code, and the deployment repurposed a flag that on that server still invoked defunct 'Power Peg' logic whose share-count stop had been silently broken by an unrelated 2005 refactor. There was no second-technician review of the deployment, no written procedure requiring one, and no automated kill switch keyed to aggregate exposure, so a single un-propagated file executed at market speed with nothing downstream able to arrest it. This is the q3 signature exactly: a small, local, latent fault in a coupled machine that propagates faster than any human control loop, producing 4 million executions and a firm-ending loss in 45 minutes.
The record
- For the 212 incoming parent orders processed by the defective code, SMARS sent millions of child orders, producing 4 million executions in 154 stocks for more than 397 million shares in approximately 45 minutes on 1 August 2012.certain
- Knight accumulated an unintended net long position of approximately $3.5 billion in 80 stocks and a net short position of approximately $3.15 billion in 74 stocks.certain
- Knight announced a realized pre-tax loss of approximately $440 million on 2 August 2012; the SEC's order states Knight ultimately lost more than $460 million on the unwound positions.certain
- One of Knight's technicians failed to copy the new RLP code to one of the eight SMARS servers; there was no second-technician review, and Knight had no written procedure requiring one.certain
- Knight paid a $12 million civil penalty in the SEC's first enforcement action under the market access rule (Rule 15c3-5), settled 16 October 2013.certain
Sources
- U.S. Securities and Exchange Commission, Order Instituting Administrative and Cease-and-Desist Proceedings, Release No. 34-70694 (In the Matter of Knight Capital Americas LLC)
- Knight Capital Group, Inc., press release dated 2 August 2012 (Exhibit 99.1 to Form 8-K), via SEC EDGAR
- U.S. Securities and Exchange Commission, press release 2013-222
The book
This entry is one of 111 in the register. The full story, and what it cost the people who lived it, is in Risky Business by Claudia Zeisberger, David Munro and Joanna Reijgersberg-Siew.
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