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Knight Time Bomb Is Ticking, But Will HFT Survive The Blast?

Knight has just received a credit line that will extend its operations at least through the end of Friday.

Knight Capital is fighting for its life as a result of the $440 million software bug that wreaked havoc on the markets. News emerged on Friday that the trading firm has received a temporary credit line which will at least see it survive without a buyer until the end of the day.

The Wall Street Journal reports that the firm has called trading-desk executives to encourage them to route trades to Knight as usual, but customers are staying away.

From the Wall Street Journal:

The source of the credit line Knight discussed wasn't clear, and that itself fueled anxiety among market players Friday morning, these participants said. Knight representatives didn't respond to requests for comment.

Some people familiar with the matter said the credit-extension was very short term, and the pressure remained on the financial firm to quickly find a longer-term solution to its funding needs, through a loan, sale or some other alternative.

Sandler O'Neill + Partners LP is advising Knight, and has sent nondisclosure agreements to a wide range of potential buyers, including private-equity firms and other financial institutions, said people familiar with the matter. It was unclear Friday if other advisers were also in the mix.

While Knight’s future is up in the air, one thing is sure: when the dust settles, there will be a serious discussion on the future of high frequency trading.

For some experts, the problem doesn’t lie with speed trading itself. If you think of previous concerns over high-frequency trading, people worried about mysterious prop shops in Chicago, downtown New York or Texas that weren’t regulated or were too lightly regulated, notes Sang Lee, chief executive and founder of Aite Group.

But the latest technology incidents that have marred investor confidence and lit up the high-frequency trading debate have surrounded such solid and respected organizations as Nasdaq, Bats, and Knight Capital, rather than unknown entities.

The issue at stake isn’t high-frequency itself, but firms, which, as exemplified by the Knight fiasco, are failing at their core competencies which in Knight’s case is around technology-driven market operations, Lee says.

“If you’re a high-frequency trading firm and you created a scenario where your strategy is a software update and you don’t do enough testing, you’ll go out of business. I wouldn’t read anything into it beyond that,” he says.

Further, it is virtually impossible to regulate high-frequency trading, Lee adds. “How do you regulate a way of trading? The question should be why are the operations of market makers fully automated? Because they have no other choice in today’s market-place where everything is being traded in microseconds.”

In a marketplace where there are 50 execution venues, it is impossible for humans alone to trade, Lee points out.

Melanie Rodier has worked as a print and broadcast journalist for over 10 years, covering business and finance, general news, and film trade news. Prior to joining Wall Street & Technology in April 2007, Melanie lived in Paris, where she worked for the International Herald ... View Full Bio

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