Question

In: Operations Management

Categorize the causes of the events at Knight Capital on August 1, 2012, into policy, governance,...

Categorize the causes of the events at Knight Capital on August 1, 2012, into policy, governance, process, and people failures.

Expert Solution

Knight Capital :It is a specialized firm that executes the trades for retail brokers

On august 1st 2012 , it lost almost $440m in cash due to faulty test of new trading software

Here are the serious of events occurred on that particular day !

As per Nanex , that offers forensic analysis has experienced a strange behavior on that D day

In trading ,generally there would be always a some gap between the price people are asking for to sell their shares, and what people are bidding to buy them.

On the morning where knight capital mishap occurred they rolled out new software , a strange behavior has been observed that lots of trades happening within that bid/ask gap.The software went out and bought at the paid ask price and then sold at the bid price again and again .

One of the stocks the program was trading, electric utility Exelon, had a bid/ask spread of 15 cents. Knight Capital was trading blocks of Exelon common stock at a rate as high as 40 trades per second – and taking a 15 cent per share loss on each round-trip transaction.

As the program continued , Knight capital fast buys and sells ,moved prices up and attracted more action from other trading program and as a result it increased the amount of losses resulting from their trades and finally resulted in loss of $440m

As a part of retrospection , it went all because of one bad algorithm and deploying in to production with out proper testing and confirmation

It was a combination of ISV software bugs , bad documentation and mainly human error

In addition to that Knight Capital violated the requirements of rule, because it did not have technology governance controls and supervisory procedures sufficient to ensure the orderly deployment of new code or to prevent the activation of code no longer intended for use

There are always 4 things we should mind when introducing any change or risk:

1.) Configuration Management

2.)Production Monitoring

3.) Risk Management

4.) Control on high volume transactions

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