Audit, Compliance and Risk Blog

Knight Capital Pays $12 Million for SEC Violations

Posted by Viola Funk on Thu, Oct 31, 2013 the wake of a Securities and Exchange Commission (SEC) investigation, Knight Capital Americas LLC has agreed to pay a $12 million penalty for violating the SEC’s market access rule. On August 1, 2012, Knight Capital’s automated equity router incorrectly sent 4 million orders into the market in the first 45 minutes of trading while attempting to fill a mere 212 customer orders. Stock prices of nearly 150 companies listed on the NYSE were severely disrupted, and Knight Capital’s stock price collapsed. SEC sleuthing revealed that the glitch was the result of deploying new code in an old, compromised router.

Daniel M. Hawke, head of the SEC Enforcement Division’s Market Abuse Unit, is quoted in an SEC press release as saying: “Brokers and dealers must look at each component in each of their systems and ask themselves what would happen if the component malfunctions and what safety nets are in place to limit the harm it could cause. Knight Capital’s failure to ask these questions had catastrophic consequences.”

The SEC indictment identified the following contraventions, among others, of the market access rule:

  • Lack of adequate controls at a point immediately prior to submission of orders to the market, such as a control to compare orders leaving the router with those entered.

  • Reliance on financial risk controls that were not capable of preventing the entry of orders that exceeded preset capital thresholds for the firm in the aggregate.

  • Failure to link the account that received the executions on August 1 to automated controls concerning the firm’s overall financial exposure.

  • Lack of adequate controls and procedures for code deployment and testing for its equity order router.

  • Lack of sufficient controls and written procedures to guide employees’ responses to significant technological and compliance incidents.

  • Failure to certify in Knight Capital’s 2012 annual CEO certification that its risk management controls and supervisory procedures complied with the market access rule.

In addition to violations of the market access rule, Knight Capital was charged with violating Rules 200(g) and 203(b) of Regulation SHO, which entail properly marking short sale orders and locating shares to borrow for short sales.

Speak Out on the JOBS Act

The SEC is soliciting public input on regulatory changes triggered by the Jumpstart Our Business Startups (JOBS) Act. You can respond with a web-based form or via email, and responses will be posted on the SEC site. For more information click here.

STP has recently published an update to Securities Law: A Guide to the 1933 and 1934 Acts and their Amendments, including Sarbanes-Oxley and Dodd-Frankand also publishes the following related guide:


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Tags: Corporate Governance, Business & Legal, SEC