The New York Times reported that – Frankenstein Takes Over the Market: This
week, yet another Wall Street firm most people have never heard of, relying on
a computerized trading program that they can’t possibly understand, shook investors’
faith in the market. This is happening a little too frequently, don’t you
think? The company, of course, was Knight Capital, a major market maker that
generated an astonishing 11 percent of all the trades in the first half of this
year, according to the Tabb Group. It caters to sophisticated Wall Street
traders as well as small investors, whose brokers often used Knight to fulfill
their trades. Trying to stay a step ahead of its competitors, Knight rolled out
some new trading software. The software wasn’t ready. Instead of fulfilling
customers’ orders, Knight’s computers went on an out-of-control spree of
rapid-fire buying and selling. As trading volumes swelled, the Wall Street guys
jumped in. (Sophisticated traders, relying on their own rapid-fire computers,
often love volatility because it leads to trading anomalies they can take
advantage of.) Many retail customers, having no idea what was going on, wound
up losing money. I know: shocker…..
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