Part 7: THE HALF BILLION DOLLAR GLITCH

Part 7

Knight Capital made headlines around the world when one of its computers went on a shopping spree that ended up costing the company $440 million. So surely its secrets would come out now.

ON AUGUST 1, 2012, the Dow Jones Industrial Average opened the day at 13,007.47.

Business headlines that morning included conservative opponents of gay marriage celebrating “Chick-fil-A Appreciation Day,” the continued reluctance of Fannie Mae and Freddie Mac to offer debt relief to their borrowers, and profit declines at the video game company Electronic Arts.

And then the Glitch happened.

Knight Capital, the company Chris DiIorio had insisted to the SEC for a year was engaged in a monumental fraud, opened the day by inadvertently buying millions of shares in 154 different stocks. The company blamed an untested software installation that triggered the rapid-fire trades.

In an environment where milliseconds can mean millions, it took Knight Capital 45 minutes to turn the software off.

Stock values surged from the high demand, and when Knight sold back the shares it had bought by mistake, it was left with a net loss of around $468 million. The New York Stock Exchange canceled trades in six of the 154 stocks involved but deemed itself “hamstrung” by SEC rules that prevented it from breaking all of them.

Knight could have used the assets on its balance sheet to absorb the loss, but DiIorio had maintained for years that many of those assets were inflated or even fictional — ghost receivables intended to balance out the massive liabilities Knight had accrued by selling stocks it didn’t really have.

And DiIorio alleged that Knight’s immediate efforts to raise the full amount of its Glitch losses, instead of offsetting them with existing assets, proved that something was amiss on its balance sheet.

Read on.

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