The computer systems at Knight Capital (NYS: KCG) had apparently taken on a mind of their own, erratically trading massive volumes of 140 different stocks. For nearly 45 minutes, Knight’s systems blasted away, leading to $440 million in losses — or roughly $10 million per minute of out-of-control trading. The losses crippled the company’s balance sheet and, just like that, put one of the world’s largest trading firms on the edge of extinction.
Jason Zweig at The Wall Street Journal and The New York Times’ Joe Nocera were quick to characterize the turmoil as one more reason for investors to throw up their hands in disgust and exit the stock market completely. They were joined by numerous others, from Financial Times to Fox Business. If you subscribed to the prevailing view, you’d easily conclude that Knight’s failure was a sign of a market completely out of control, and, furthermore, that it was a reason for individual investors to lose their last shred of faith in stock markets.
The apparently obvious conclusion isn’t always the right conclusion, however. The trading glitch at Knight Capital did indeed represent failure on a massive scale. But this was a very different kind of breakdown than many of the other failures in recent memory, including the stomach-wrenching “flash crash” of 2010. As Ron Kruszewski, the CEO of eventual Knight investor Stifel Financial (NYS: SF) put it to us