It took 17 years of work dedicated to Knight Capital Group in one of the most important houses of Wall Street trading. Almost all gone in less than an hour.
What happened to the Knight on the morning of August 1 is the nightmare of every Chief Executive: a simple human error, easily spotted with the benefit of hindsight but almost impossible to predict in advance, has threatened to terminate the undertaking. The details vary from industry to industry, but in the big picture, what happened to the Knight can happen in any business.
The rider, some new trading software contained a defect that has become apparent only after the software has been activated when the New York Stock Exchange opened that day. The errant software posted Knight on a buying spree, snapping up 150 different stock for a total cost of about $ 7 billion, all in the first hour of trading.
Under stock exchange rules, Knight would have been necessary to pay for those shares three days later. There was no way they could pay, since businesses were unintentional and they had no source of funds behind them. The only alternatives were to try to have the trades canceled or to sell newly acquired shares on the same day.
Knight tried to get the trades canceled. Chairman of the Securities and Exchange Commission Mary Schapiro declined to allow this for most of the reservations in question, and this seems to have been the right decision. The rules were established after the “flash crash” of May 2010 to govern when trades should be canceled. Buying binge of the Knight did not drive the price of the shares purchased by more than 30 percent, the threshold for annulment, except for six titles. These transactions were reversed. In other cases, businesses.
This was very bad news for the rider but only fair to its trading partners, which sells its shares to Knight’s computer in good faith. Knight trades were not like those of the flash crash, when suddenly the stock of some of the largest companies in the world began trading less than a cent, and no buyer could claim credibly that the price of the transaction reflects fair market value.
Once it was clear that the trades you would stand, Knight had no choice but to sell stocks it had bought. How to buy morning rampage had driven up the price of those shares, a massive selling in the market would probably be forced down the price, possibly to a point so low that Knight would not be able to cover the losses. Goldman Sachs stepped to buy the entire unwanted position of Knight at a price that cost $ 440 million, Knight-an awesome shot, but a study might be able to absorb. And if the rider has failed, injured, alone apart from Knight’s shareholders (including Goldman), Goldman would have been the same.
Disposal of shares purchased by accident was only the first step in the battle of CEO Thomas Joyce Knight to save her company. Crafts had weakened the company’s capital, which would be forced to cut significantly the business, or perhaps to stop working altogether, without an infusion of cash. And as Word spread about the debacle of software, customers were able to abandon the company, if they don’t trust their financial and operational capacity.
If the commercial disaster alone does not earn a place in the future Knight business school case studies, what followed in four days certainly did. First, Joyce has secured a line of credit for his company to assure customers that had the resources to stay in business. Then, over the weekend that followed the disaster, has put together a deal to sell most of the company’s equity to a group of outside investors. This restored the financial soundness of the company at a great price to shareholders, who saw most of their stock market value wiped out. But aside from the owners of the company, no one associated with the rider and not the taxpayers or other third parties, have been harmed financially. New investors may have made a good investment in the long term.
Running a business is the art of face unlimited opportunities with limited resources, avoiding threats and risk management. The head of every company, no matter how big or small, should make for stable and durable Enterprise so that it can weather short-term shocks in the pursuit of long-term goals. Almost all of us do.