Explaining The Knightmare

zerohedge.com / By Tyler Durden / August 6, 2012

On the day Knight blew up, and its stock tumbled initially to the $7 range, when the market speculated the loss may be “only” as large as $150-$250MM, we calculated courtesy of a Nanex analysis which suggested the modus operandi of the “berserk” algo, that the finaly loss would be far greater. This was confirmed a day later when it was made public that the final loss KCG experienced in just 45 minutes of trading was at least $440 million, and will be far greater when the losses associated with all the external trading reroutes are calculated. Nonetheless, with the SEC still completely mum on the whole issue (for one simple reason: it has no idea what happened, and is quiet not out of malice, but sheer incompetence), there is still an open question of just what happened. Here, once again from Nanex, is the complete post-mortem of a firm that was almost fully mortem, explaining everything that happened.

From Nanex:

The Knightmare Explained

We believe Knight accidentally released the test software they used to verify that their market making software functioned properly, into NYSE’s live system.

In the safety of Knight’s test laboratory, this test software (we’ll call it, the Tester) sends patterns of buy and sell orders to its new Retail Liquidity Provider (RLP) Market Making software, and the resulting mock executions are recorded. This is how they could ensure their new market making software worked properly before deploying to the NYSE live system.

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2012-08-06 13:49:37

Source: http://silveristhenew.com/2012/08/06/explaining-the-knightmare-2/