It's turning out to be one costly glitch.
A technical problem that briefly threw dozens of stocks into chaos Wednesdaywill cost Knight Capital Group $440 million, the trading firm said Thursday.Knight's own stock plunged for a second day, erasing 75 percent of its value intwo days. The company also said it is pursuing ways to raise money to fund theexpense, raising questions about the firm's viability. And at least twofinancial institutions announced they had halted trading with Knight, at leasttemporarily.
Knight's embattled CEO Thomas Joyce appeared publicly for the first timeThursday to defend his firm in the aftermath of the trading disaster.
"You cannot keep people from doing stupid things," Joyce said in aninterview on Bloomberg Television. "That is what happens when you have aculture of risk."
In the two days since the glitch occurred, Knight's stock has fallen to $2.58from $10.33 on Tuesday. Knight takes orders from brokers like TD Ameritrade andE-Trade and routes them to the exchanges where shares are traded.
E-Trade Financial and Vanguard said they were not routing trades through Knightfor the time being, but would continue to assess the situation. Vanguardspokesman John Woerth called Knight "a longtime and valued partner."
TD said it was doing test runs before routing trades through Knight. It plannedto keep sending orders as long as Knight "remains in good standing"with stock exchanges. "They've been a good and trusted partner," TDspokeswoman Beth Evegan said.
Knight, which on Wednesday had directed clients to route their trades withother vendors, didn't make the same request Thursday, according to TD. Aspokesman for another brokerage, Fidelity, declined to comment on whether thebrokerage was still routing trades through Knight. About a third of Fidelity'sorders go through Knight, according to a regulatory filing.
Knight Capital Group said the problem was triggered when it installed newtrading software, which resulted in the company sending numerous erroneousorders in 140 stocks listed in the New York Stock Exchange. Those orders werebehind some sudden swings in stock prices and surging trading volume shortlyafter the market opened on Wednesday.
Wizzard Software, for example, shot above $14 after closing the night before at$3.50. Abercrombie & Fitch jumped 9 percent within minutes, hitting $36.75after closing the night before at $33.80. Harley-Davidson suddenly fell 12percent, to $37.84 from $43.23.
The New York Stock Exchange said Wednesday morning that it was examiningunusual trades in about 140 stocks. Later in the day it canceled trades of sixsmaller stocks that had wide swings, including Wizzard. Knight Capital saidThursday the software had been removed and that clients were not negativelyaffected.
For investors, it was the latest breakdown in the increasingly complicatedelectronic systems that run stock trading. Those systems have been showingsigns of strain as more traders and big investment firms use powerful computersto carry out trades in mere fractions of a second.
These trading issues have become so problematic and frequent that many expertsbelieve they have shaken investors' faith in markets, especially after the deeplosses they suffered during the financial crisis and the recession thatfollowed. As a result, many small investors have been fleeing the stock market.
"It's speaking to the lack of trust that retail investors have with WallStreet," said Dave Abate, senior wealth adviser at Strategic WealthPartners in Seven Hills, Ohio. "Firms are getting punished whenever thereis any hint of an error or a situation where the little guy is possibly beingtaken advantage of. I think there's just zero tolerance for that."
The latest disruption came in May, when technical problems on the Nasdaq stockmarket marred Facebook's debut as a public company, preventing some investorsfrom knowing if they'd bought shares or being able to sell them.
The most visible and chaotic malfunctions occurred in May 2010, when the DowJones industrial average dropped nearly 600 points in five minutes, an eventthat was dubbed the "flash crash." The problem at that time was alsotraced to technical glitches.
In the 26 months since the flash crash, there have been inflows of money fromretail investors in only six months. The total net outflow of money over thatperiod from stock funds was $172 billion, according to fund consultantStrategic Insight.
This glitch is an ironic embarrassment for Knight's CEO Joyce, who publiclycriticized Nasdaq for the problems with Facebook's initial public offering.
Joyce, who had undergone knee surgery on Tuesday, came back to work onWednesday to the chaos in the markets emanating from the firm he leads. On Thursday,he tried to reassure investors and defend high-speed trading practices.
"We have all hands on deck and we understand what the issues are,"Joyce told Bloomberg TV. "We are talking to a lot of capable people,people who are in touch with situations like this. So, we're working hard andwe have all hands moving forward to address this and resolve this."