Knight Capital Americas LLC will pay $12 million to settle charges brought by the SEC over a computer trading glitch that cost the company as much as $460 million in erroneous trading orders in August 2012.
Securities and Exchange Commission officials said the malfunction also disrupted markets.
The case is the SEC's first enforcement action using a 2010 market-access rule designed to ensure that brokers and dealers have adequate safeguards against trading errors that could risk disrupting markets. Knight Capital, which did not admit or deny the charges, also agreed to hire an independent consultant to review its compliance procedures and controls.
“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 Andrew Ceresney, co-director of the SEC's enforcement division, in a statement. Daniel Hawke, chief of the division's market abuse unit, added in the statement that Knight Capital's failure to assess each component of its systems for potential malfunction and safety nets “had catastrophic consequences.”
According to the SEC complaint, Knight Capital suffered “a significant error” in its automated routing system for equity orders that routed millions of orders into the market and obtained 4 million executions over a 45-minute period, leaving the firm with a $3.5 billion net long position and $3.2 billion net short position.
In 2013, Knight Capital and GETCO merged to form KCG, and KCG spokeswoman.Sophie Sohn said in an e-mailed statement that the new company “is pleased to put the events … behind us. KCG is committed to employing best-in-class risk management processes.”