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 quadrant
SMARS was deployed by hand to eight servers and one did not receive the new code. The deployment reused a flag that on that server still triggered defunct Power Peg logic, whose share-count limit an unrelated 2005 refactor had silently broken. No second technician checked the deployment, no written procedure required one, and no kill switch was keyed to total exposure. Four million executions and 440 million dollars later, someone stopped it by hand, 45 minutes in.
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
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