Knight Capital Fined $12M For a Software Bug That Cost $460M

Mark Gibbs writes "Knight Capital monumentally fouled up a software update. According to the SEC, 'Knight did not have supervisory procedures to guide its relevant personnel when significant issues developed.' In other words, not only was Knight's code management inadequate but their human management processes were just as bad. The fine for what could have been a biblical financial disaster? A measly $12 million."

The fine wasn't all of the punishment

[Jay Maynard]

That $460 million came out of Knight Capital's pockets too...and is far more effective than any fine the SEC could levy. Why should the SEC pile on, aside from the populist outrage that goes along with people handling billions of dollars?

Bad code wasn't the problem

[onyxruby]

This had absolutely jack to do with bad code, that wasn't the problem. The problem was a failure to adhere to best practices that would have prevented the bad code from ever seeing production to begin with. The lack of a process for the distribution of code to production made a failure for bad code inevitable.

This was sheer incompetence of the highest magnitude and should have been readily caught in the lab. This is what happens when cowboys run the show and ITIL is considered a four letter word. Take your younger staff, the wannabe cowboys and make them read this report. Let them learn at others incompetence. As for getting your management to read this, that's an entirely different story.

Re:compensation

[Capt.Albatross]

How about suing? Did those who were hurt sue?

The customers have probably signed an agreement to settle disputes exclusively through binding arbitration - I believe this is an almost universal practice in the financial industry, as a condition for doing business, and no, you can't take your business elsewhere. That arbitration is widely regarded (at least outside of the industry) as being biased towards the financial industry.

Re:The fine wasn't all of the punishment

[Software]

If Knight had put the $460 million in a pile and burned it, there would be no fine. The problem was that their algorithm was wildly buying and selling shares in the open market, and thus distorting that market. See the graph at http://www.businessweek.com/articles/2013-06-06/the-knightmare [businessweek.com] for an example of a stock that was affected. What if you were an investor in that stock who had set a stop-loss at $10? Knight's wild selling would have triggered the stop-loss, and you'd lose money because of Knight's actions. This gross market distortion is what the fine was meant to punish.

Re:compensation

[Capt.Albatross]

For instance in the mortgage fraud scandal they were allowed to settle fraudulent foreclosures for pennies on the dollar. Why are these companies never required to make the people they hurt whole again?

I don't intend to defend Knight Capital, but there is a big difference between its incompetence and negligence in this case, and the deliberate and fraudulent actions that characterized the mortgage mess. No individual in the financial industry has been held accountable for these actions, even while some of the people they exploited have been prosecuted: http://www.nytimes.com/2011/03/26/business/26nocera.html?_r=1&pagewanted=all [nytimes.com] [In Prison for Taking a 'Liar Loan' - Joe Nocera - NY Times; may require registration, or try reaching it through a search engine.] This, I believe, is the "most scandalous aspects of the financial mess of 2008."