Knight Capital fined $12M for trading violations

Mike Snider, USA TODAY 12:29 p.m. EDT October 16, 2013

Financial firm the Knight Capital Group, which merged with Getco in the wake of a 2012 stock trading glitch, has agreed to pay a $12 million fine from the Securities and Exchange Commission.

It marks the SEC’s first enforcement action under its market access rule, adopted in 2010.

On Aug. 1, 2012, Knight Capital sent more than 4 million erroneous orders in 140 stocks listed in the New York Stock Exchange. Those orders were behind some sudden swings in stock prices and surging trading volume.

Knight Capital had said that the installation of new trading software[1] triggered the problem, resulting in a loss of about $440 million[2].The company nearly collapsed — its stock price fell about 75% in two days — but other Wall Street firms gave it a $400 million cash infusion in return for control of its board.

The SEC’s subsequent investigation found that the firm did not adequately safeguard market access in the disruptive trading incident. Nor did the firm adequately review its controls, the SEC said.

The agency had adopted rules in 2010 to limit market access risks. “The market access rule is essential for protecting the markets, and Knight Capital’s violations put both the firm and the markets at risk,” said SEC enforcement division co-director Andrew Ceresney in the agency’s announcement of the action[3]. “Given the rapid pace of trading in today’s markets and the potential massive impact of control breakdowns, broker-dealers must be held to the high standards of compliance necessary for the safe and orderly operation of the markets.”

Knight Capital, which completed its merger with Getco in July, consented to the SEC order without admitting or denying the findings. Under the order, the firm must retain an independent consultant to review its procedures to ensure future compliance with the market access rule. Knight Capital[4] on Tuesday announced that in September it averaged $26.4 billion in daily trading — 4.8 billion shares and 3.9 million trades per day — in U.S. equities, down slightly from $28.5 billion in September 2012.

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