Rogues of Wall Street

CHAPTER 8 Rogue Computer

Faulty software led Knight Capital Group to record thousands of erroneous trades with the NYSE, leading to huge losses and imminent bankruptcy.¹ The Facebook IPO was going to be the IPO to end all IPOs. It all went wrong, however, on the day due to software glitches.² The error's ripple effects lasted for days, and some market participants experienced significant losses. Another problematic IPO in 2012, though less high profile, was the BATS (Better Alternative Trading System) public filing, which had to be canceled due to software glitches. These events threw a spotlight on critical execution aspects of technology in facilitating trading activity and potential sources of great operational risk therein.

History of Technology in Public Markets and Increasing Risk

It is doubtful that any CEO of a major brokerage house at the beginning of 2012 would have listed technology failures in sales and trading and IPOs as leading candidates for public relations disasters and major financial losses. Yet in the space of a few short months, the BATS IPO, the Facebook IPO, and Knight Capital all grabbed headlines and losses for the wrong reasons. Given the rapid growth of technology in all aspects of the market, however, such events should not have been a big surprise and while attention is still focused here, it is worthwhile reviewing recent developments and what can be done to address these issues.

The use of technology has been a feature of public stock ...