(Adds quotes from SEC officials, details from KCG CEO's letter
By John McCrank
NEW YORK, Oct 16 (Reuters) - Knight Capital, now part of KCG
Holdings Inc, was fined $12 million to settle charges
connected with a trading error in 2012 that caused millions of
errant orders to flood the market, the U.S. Securities and
Exchange Commission said on Wednesday.
Knight did not have appropriate risk controls in place to
prevent the execution of erroneous trades or orders that exceed
pre-set credit or capital thresholds, violating the SEC's Market
Access Rule, the regulator said.
On Aug. 1, 2012, a software problem at Knight caused 4
million orders unintentional orders into the market over a
45-minute period, 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 of over $460
"These numbers highlight the risks that arise from automated
trading, and the immense consequences that errors can have both
for the firm itself, and for the market in general," Daniel
Hawke, chief of the SEC Enforcement Division's Market Abuse
The trading error 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.
"As trading technology evolves, controls and compliance must
keep pace," Hawke said.
Knight had also failed to conduct adequate reviews of the
effectiveness of its controls, the SEC said.
Knight neither admitted nor denied the SEC's findings.
The settlement was another step in moving beyond the
problems Knight had last year, KCG Chief Executive Daniel
Coleman said in a letter to KCG clients.
He said the firm has implemented numerous risk control
measures, including automated controls that would shut down
trading when predetermined thresholds have been crossed,
automated alerts, and an "Emergency Response Center."
While the settlement was the first time the SEC has charged
a firm under the market access rule, which it adopted in 2010,
the regulator said it would be an important area for enforcement
"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 should have been able to catch its error before it
had such a devastating effect, as an internal system at the firm
generated 97 automated emails to a group of personnel
referencing the problem prior to the trading incident, but no
one acted on the emails, the regulator said.
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.
(Reporting by John McCrank; Editing by Bernadette Baum and