UPDATE 2-Regulator fines Knight $12 million over trading error
(Adds quotes from SEC officials, details from KCG CEO's letter to clients)
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 million.
"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 Unit.
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 going forward.
"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 Richard Chang)
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