Two months after Knight Capital Group Inc. (KCG:US) lost $440 million in a computer malfunction, the trading firm reassigned the executive in charge of technology.
Steven Sadoff, who oversaw operations and technology at the Jersey City, New Jersey-based firm, was moved to a role building Knight’s clearing, prime brokerage and futures businesses. The company consolidated oversight of its finances and operations under a single executive, naming Chief Financial Officer Steven Bisgay to the added post of chief operating officer.
Knight was taken over by six Wall Street firms including Jefferies Group Inc. and Blackstone Group LP (BX:US) in August after losses associated with the software error depleted its capital. The investors, who paid $400 million for securities convertible into more than 70 percent of Knight’s equity, are represented by three new Knight directors.
“It appears that this was a result of recent events,” Rich Repetto, a New York-based analyst for Sandler O’Neill & Partners LP, said in a telephone interview. “They are shaking up the company a bit in the technology area.”
Bisgay will add the responsibilities effective immediately, the Jersey City, New Jersey-based company said yesterday in a statement. The market maker also promoted Brian Strauss to chief risk officer in a newly created role and began a search for a chief technology officer as well as an operational and technology risk manager.
Knight bombarded U.S. equity exchanges with erroneous orders on Aug. 1 as it began trading with the faulty software, according to Chief Executive Officer Thomas Joyce. The error caused volume to surge and prices to swing in dozens of securities.
“After careful consideration, we concluded it was best to consolidate responsibility for all financial, operational and technology risk under a single executive,” Joyce said in the statement.
Knight said earlier this week that Joseph Wald, head of trading algorithms for institutional clients, had left to “pursue other opportunities.” The move was unrelated to the Aug. 1 events, said Kara Fitzsimmons, a spokeswoman for Knight.
The shares (KCG:US) fell 0.8 percent yesterday to $2.57 and have lost 75 percent since the trading error.
The shakeup came as lawmakers and securities professionals met in Washington to consider ways to arrest a growing perception that computers are adding instability to stock trading in America.
In addition to Knight’s debacle, exchange operator Bats Global Markets Inc. pulled its initial public offering in March after failing to get its own stock to trade and Wall Street firms lost hundreds of millions of dollars when Nasdaq OMX Group Inc. mishandled Facebook Inc.’s public debut in May.
Richard Ketchum, the chief executive officer of the Financial Industry Regulatory Authority, said more discipline is needed from brokers.
“Firms need to re-examine how prepared they are to deal with inevitable problems,” Ketchum said at a Security Traders Association conference. That involves “ensuring that there’s someone on the trading desk always with responsibility to make a determination on whether to stop the flow going to exchanges,” and “reviewing how quickly that order flow gets stopped,” he said.
Sal Arnuk, a partner at Themis Trading LLC and frequent critic of U.S. market structure, said incentives paid by exchanges to attract orders have put too much emphasis on speed among the high-frequency traders who account for most trades.
The implementation of rules known as Regulation NMS in 2007 has led to a fragmented market in which orders are executed on 13 exchanges, several alternative venues, more than 40 dark pools and through other broker-dealer systems. The rules drove a focus on speed and led to the expansion of order types for high- frequency firms, Joseph Mecane, head of U.S. equities at NYSE Euronext, said Sept. 19 at a conference in Washington.
“It’s a game of pick up the rebate,” Arnuk said in an interview on Bloomberg Television. “Race to zero in speed, be first in line to pick up the exchange rebates, have the best cutting-edge algo. The combination of this is what’s caused the systemic risk in the marketplace especially over the last few years.”
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