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How did Knight Capital Glitch Affect Canada?

8 August 2012

It was a week ago today that several of the stocks on the New York Stock Exchange were hit by a glitch caused by Knight Capital. Knight had released software (unknowingly) that could (in theory) automatically monitor algorithms on the stock market, and buy and sell electronically. But the software wasn’t ready and for 45 minutes – an excruciating amount of time on the stock market – Knight Capital lost nearly four times what they made last year; a pre-tax loss of about $440 million.

Although you can see from the chart above how Knight Capital shares were affected by the computer glitch last week, dozens of New York Stock Exchange securities were temporarily sent into a whirlwind as well. Dozens of stocks rose or fell as much as 151 per cent in just two days; and a total of 140 stocks in total were somehow hit by Knight’s computer error. This has caused panic once again, on the NYSE, and for Canadian shareholders and Canadian companies as well.

So what does it mean for us here at home?

Essentially, nothing. Although over a hundred stocks were affected, only those that saw price differences of 30 per cent or more had their activity rewound to levels they had been before the glitch. In total, that ended up being only six; and none of them were Canadian. In fact, the Canadian gold stocks that are currently being traded on the NYSE didn’t see their prices touched at all.

In fact, of the biggest losers in all of this, stands Knight Capital – who were facing bankruptcy immediately after the huge error. Thanks to a group of investors that’s buying convertible preferred shares in a deal totaling $400 million, they will also be able to rebound.

But all of it lowers confidence in the NYSE; and that does affect us here at home.

A recession in Italy, crisis all over Europe, and most pertinent in this case – the slow recovery of the United States. All of this weighs on the mind of Canadians as the federal government continues to implement policy after policy to help deal with the changing economic environment; interest rates remain low, and that continues to hurt some investors while helping some consumers. This one little blip, that took just 45 minutes, now leaves many questions in the minds of many.

Mostly it reaffirms doubts that investors have been having about the NYSE and its security. The crash in 2008 is still just too fresh for too many, and confidence just isn’t there yet. Then there was the “flash crash” in 2010 when Infinium Capital in Chicago, in just three seconds, lost $1 million – again due to a computer algorithm gone awry.

All of it lowers confidence in the NYSE and, because it’s an American market and only really affected one company, Canada escaped this time. But it does bring many questions to the forefront, and has just about every investor in any stock market nervous with the “what ifs” of it all.

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