Hotspot FX Parent Knight Capital Down 50% on Equity Algo Failure

Shares of Knight Capital, parent group of Hotspot FX are down 50% today after a trading glitch caused the firm

Shares of Knight Capital, parent group of Hotspot FX are down 50% today after a trading glitch caused the firm to lose $440 million in trades. The errors occurred at the beginning of Wednesday’s trading, however initial reports were that a large percentage of trades would be cancelled, thus leaving Knight with a smaller trading loss in its equity market making activities. The announcement from the firm this morning of realized losses of $440 were much greater than any previous estimates and puts the firm on bankruptcy watch.

CEO Tom Bryce was on Bloomberg TV earlier today and stated that “we’re open for business” but shed little light on how the company would assure its counter parties to continue to trade with them.

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Computer glitches have been common contributors to price discrepancies in global financial markets. In May 2010 NYSE had cancelled trades in 286 securities that had movements of 60%. Another incident was recorded on the London Stock Exchange when the new Linux-based Millennium Exchange went live and affected pricing on instruments.

Liquidity helped the fx market to trade efficiently however an erroneous trade placed at Rabobank on 12st July 2010 caused a 1% move in GBP USD. Rabobank trades caused sterling to drop from 1.53 to 1.518 against the dollar in a short period of time.

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As far as Hotspot FX is concerned, the institutional Forex trading platform continues to operate as usual today and has been unaffected by the events from Knights equity division.

Unlike Knights equity trading business, Hotspot FX is an ECN trading platform and the firm doesn’t act as a market maker. Nonetheless, banks and brokers that use the platform are required to post credit to guarantee counterparty delivery of trades. These funds could come under attention among Hotspot’s users if Knight is forced to file for bankruptcy.

Hotspot is one of the Knight’s most profitable units and would be a very lucrative target for larger forex players if Knight finds itself in need to raise cash urgently. Hotspot transacted $31.3 billion per day on average in June (figures double counted) and is considered the fastest growing ECN in the forex market.

Stay tuned for new updates from Hotspot and Knight Capital.

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