> Actually, we made way less of Knight's $400m than we could have because our risk systems kept shutting strategies down because what was happening was "too good to be true".
Aren't a lot of trades undone anyway by the authorities after such severe market hiccups?
This is a good question. In my experience, I have only see exchange trades reversed when there was a major bug in exchange software. If the bug is on the client side, tough luck. And reversing trades done on an exchange is usually a decision for the exchange regulator. It is a major event that only happens every few years -- at most -- for highly developed exchanges.
Reversing or amending a single "fat finger" trade happens all the time and the exchange generally has procedures for this that don't involve a regulator.
Even in the most controversial recent example - LME cancelling a day's worth of nickel trades [0]- I understand it was their call and not any external regulator. That said, while I'd count LME as a "highly developed exchange", it's the Wild West compared to the US NMS.
As I understand, the LME nickel trade reversal was to prevent total meltdown due to multiple counterparties going bankrupt at the same time. To me, it was a classic case of exchange limits and poor risk control. "If you owe the bank $100 that's your problem. If you owe the bank $100 million, that's the bank's problem. -J. Paul Getty (of course, add some zeroes for today's world)
Also, can you explain more about what this phrase means? "it's the Wild West compared to the US NMS" Are you saying the risk limits and controls on LME are much worse that US markets?
> [...] the exchange generally has procedures for this that don't involve a regulator.
That's part of why I vaguely referred to 'the authorities' in my original comment. I wasn't quite sure who's doing the amending and reversing, and it wasn't too important.
Normally trades are undone or amended in price if they are executed far away (say 10%+) from what is determined to be reasonable market prices. And when amended, they get amended to a price that's still in the same direction, so the market taker still loses a little bit compared to the fair price.
KCG traded in such liquid instruments and in such a way that it didn't move the market that much. They lost a hundred dollars a trade on 4 million trades.
The article says some stocks were moved by more than 10%, but as I recall that was a small fraction of them.
Technically KCG didn't exist yet. NITE, aka Knight Capital Group lost ~$460 million. Getco bought NITE forming KCG (Beating out Virtu's bid which later purchased KCG) and now is called Virtu Financial (VIRT).
Aren't a lot of trades undone anyway by the authorities after such severe market hiccups?