August 1 was not a good day for Knight Capital.? That was the day it unintentionally built up a gross position of $7 billion in just 40 minutes as it lost control of one of its algorithms at the New York Stock Exchange. According to the Wall Street Journal, ?one line of code? was enough to sink a major market trading force. The firm was hit with $440 million in losses,? which it said ?severely impacted? its capital base, and ended up being more than an entire quarter?s worth of revenue.
In December, Getco Holdings announced that it was buying Knight for $1.4 billion, which was a 13% premium to the closing price of Knight stock the day before the announcement was made.? However, the price was also 64% discount to where Knight traded at before the ?one line? of coding caused its trading errors. ?
This, of course, is leading to litigation from shareholders. On December 31, Bloomberg News reported that legal action was proceeding, saying ?The price is ?unfair and grossly inadequate,? and will deny investors ?their right to share proportionately and equitably in the true value of the company?s valuable and profitable business, and future growth.??
Interestingly, on December 18 the Wall Street Journal that the heads of several large trading venues spoke before the Senate Banking Committee and said that the U.S. markets have become overly complex and opaque, and an overhaul is required to restore investor confidence.? This is interesting because Advanced Trading reported, ?it was not wild risk taking or sophisticated algorithmic trades at issue here but boring old IT risk management practices.? ?