Galen Stops looks at industry responses to the Knight Capital disaster and argues that regulators are trying to solve the wrong problem.
The events surrounding Knight Capital’s recent
$440m loss, coming so soon after the 2010 Flash Crash and the
BATS and Facebook IPO disasters, have re-opened the debate on
whether the ever increasing automation of the financial
industry is desirable, or even safe.
This is because, in truth, all of these scenarios could have
been much worse (for the financial industry as a whole, rather
than the companies involved). Imagine if the market
hadn’t rebounded in 2010? Or the
'glitch’ suffered by Knight had taken place
instead at a systemically important institution that would have
required a taxpayer bailout?
Everyone seems to be in agreement that it’s a
scary situation where a technological glitch or a small mistake
in coding can lead to a major market maker like Knight being
almost ruined in the space of 45 minutes. What is less clear is
what the industry can do to stop events repeating
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