GASPARINO: A $5 Billion Trade That Was Supposed To Happen Over 5 Weeks Is What Doomed Knight Capital

Charlie Gasparino reports on the trade that caused markets to go haywire yesterday, and which caused market maker Knight Capital to lose $440 million.

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Photo: Charlie Gasparino

This is actually very similar to what Doug Kass’ “Gnome” said in a Real Money post yesterday:

High above the Alps, my Gnome is saying that an algo program that was supposed to be executed over a five-day period was mistakenly executed over a five-minute period this morning and caused the unusual price behaviour in certain equities.

It’s worth noting that this kind of massive volume trading is a big part of what “algos” do. Large institutions want to sell huge blocks of stock, which, if done at one time, or if done without subtlety, would cause huge market distortions.

So algos (and algorithmic traders) find the best way to execute the trade while making the fewest ripples possible.

That did not happen yesterday.

UPDATE: FT has more on the story. They also cite traders in saying that the trade happened over a few minutes, but suggest that the intended timeframe was more modest — 1 to 5 days — rather than 5 weeks.

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