(Adds details of the SEC report and trading glitch, background
NEW YORK, Oct 16 (Reuters) - Knight Capital Americas, now
part of KCG Holdings Inc, has agreed to pay $12 million
to settle charges in connection with a trading glitch in 2012
that roiled markets, the U.S. Securities and Exchange Commission
said on Wednesday.
Knight violated the SEC's Market Access Rule, which requires
brokers to put in place risk controls to prevent the execution
of erroneous trades or orders that exceed pre-set credit or
capital thresholds, the regulator said.
On Aug. 1, 2012, a software problem at Knight led to
millions of unintentional orders flooding the market over a
45-minute period, leaving the firm with a huge position it had
to unload at a total loss of $461 million.
Knight had also failed to conduct adequate reviews of the
effectiveness of its controls, putting both the firm and the
market at risk, the SEC said.
The incident forced Jersey City, New Jersey-based Knight to
seek investors to help it stay afloat. The firm was later bought
by Chicago-based Getco Holding Co for $1.4 billion in a deal
that closed in July.
"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," said Andrew
Ceresney, co-director of the SEC's Division of Enforcement.
Knight's failure to remove a section of computer code from
its automated equity router, rendered the router defective, the
SEC said. The firm later deployed new code to the same order
router, triggering the defective function that left it unable to
recognize when certain orders had been filled.
The result was that Knight's order router sent more than 4
million orders to the market within a span of 45 minutes when
attempting to fill just 212 customer orders, the SEC said.
Knight traded more than 397 million shares and ended up with
"several billion dollars" in unwanted positions, which it had to
unload at a loss, the SEC said.
Knight should have been able to catch the bug, as an
internal system at the firm generated 97 automated emails to a
group of personnel referencing the routing error prior to the
trading incident, but Knight did not act on them, the regulator
On top of the $12 million penalty, the SEC ordered Knight to
retain an independent consultant to conduct a comprehensive
review of the firm's controls and procedures to ensure
compliance with the market access rule.
Knight did not admit or deny the SEC's findings.
(Reporting by John McCrank; Editing by Bernadette Baum)