(Image: Jamie Grill/Getty)
The dangers of high-speed, computerised stock trading - which have in the past caused inexplicable "flash crashes" in the markets - have now been visited big-time upon one of the companies in the vanguard of wielding the technology.
Trading software at Knight Capital Group of New Jersey this week began automatically buying shares in a vast array of companies - like RadioShack, Ford Motor Company and American Airlines - in a 45-minute foray of unauthorised trading. When the company then quickly resold its newly acquired, unwanted stock (its massive stock buys had moved the markets) it found it had lost $440 million - four times the profit it made in 2011.
The loss has seriously hit the company's ability to conduct business, says The New York Times. The newspaper says Knight Capital has been a hyper-enthusiastic user of automated trading - indeed, it calls Knight Capital an "unapologetic advocate" of it - and says the firm has striven to outperform its competitors by using such systems to their fullest extent.
The news won't surprise observers who understand the technical limitations of trading with fallible computer systems at speeds humans cannot fathom. The Bank of England warned last summer that high-frequency computerised trading systems that buy and sell shares in fractions of seconds risk destabilising stock markets, with the bank's executive director for financial stability describing the use of such algorithms as "a race to zero".
The US Securities and Exchange Commission is investigating just what happened at Knight Capital - and calls for tighter regulation of computerised trading have already begun.
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