UPDATE 1-Knight to pay $12 mln to settle trading glitch charges

10/16/2013

(Adds details of the SEC report and trading glitch, background on Knight)

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 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.

Knight did not admit or deny the SEC's findings. (Reporting by John McCrank; Editing by Bernadette Baum)



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