In the Matter of Knight Capital Americas LLC

Knight Capital Americas LLC (Knight) (defendant) was a registered broker-dealer. Knight’s automated algorithmic router, SMARS, received “parent” orders from Knight’s trading platform and sent “child” orders into the market for execution. Knight changed a SMARS software code, but a technician failed to copy the new code to one of SMARS’s servers. No other technician checked, and no one realized the new code had not been added. The old code had a cumulative-quantity feature that instructed the server to stop sending out child orders when the parent order was filled, but the feature had been moved and the code was never retested to determine whether the feature still worked. On August 1, 2012, parent orders sent to the eighth server triggered the old code, which caused the server to send out millions of child orders for execution. Although orders designated for pre-market trading prompted emails that would have alerted Knight to the problem, the emails were not designed to be system alerts and were not reviewed before the market opened. Knight continued to send orders while its technology staff worked to identify and resolve the issue. Knight’s risk-monitoring tool was not linked to its entry of orders so that orders would automatically stop when pre-set capital thresholds for the firm were exceeded. As a result of the malfunction, Knight realized a $460 million loss. The Securities and Exchange Commission (SEC) (plaintiff) instituted public administrative and cease-and-desist proceedings, alleging that Knight violated the rule requiring broker-dealers with market access to have risk-management controls and supervisory procedures. Knight consented to the entry of an order instituting proceedings, making findings, and imposing remedial sanctions and a cease-and-desist order.