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September 1, 2012

Hard Facts of Software

By Michael Scotti

What do Knight Capital Markets, Nasdaq OMX and BATS have in common? The answer is the focus of our cover story this month. Software glitches have clobbered brokerage firms this year, and in his piece editor Peter Chapman looks at three major snafus. How did Knight lose $440 million on Aug. 1, when it mistakenly bought billions of dollars in stock? Also, what caused two exchanges' IPO software problems? Remember Nasdaq had a glitch when Facebook went public in May, causing brokerage houses to lose hundreds of millions of dollars. And BATS' story is almost beyond belief. After the company went from zero to one of the top U.S. exchanges in less than a decade, BATS' IPO self-destructed in March. A systems glitch blew up its offering on its own market. Brokerage firms were hurt too. Many invested in the upstart mart and were counting on that payout from the IPO.


So what does all this mean? In one sense, the question that must be answered is, "How much manual intervention is needed in an electronic market?" Peter Chapman's story addresses that. But there are other issues as well. Believe it or not, glitches were not uncommon at the exchanges in the 1990s, as the equity markets migrated to increased electronics. Knight experienced a $1 billion loss in its options business due to a glitch in 2004. But those were simpler times on Wall Street. In those halcyon days, traders let Knight out of the trades. Read this timely story and you'll begin to wonder if the industry understands how its software actually works.

Elsewhere in the issue, there's a story in our Rules and Regs section on how the SEC is getting into the speed game. It has signed up an HFT firm to provide it with real-time data for equities and options. It says now it will more effectively track marketplace activity. The SEC is also launching an analytics group that will take the trading information and do its own research through its new Office of Analytics and Research. It's hiring, too.

We've also got our standard fare of options and FX, and September includes Clearing Quarterly & Directory, so we're serving up a hearty editorial fare to sink your teeth into this month. Our options story looks at a small firm that is looking to help institutions take the risk out of their portfolios. Our FX coverage features a Q&A of two separate executives at Bloomberg. I hope you enjoy the issue. Where did the summer go?

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