At the beginning of August, the Knight Capital Group, a broker of U.S. stocks, lost $440 million in about 45 minutes. Losses (and gains) of that magnitude are a part of the natural order for stock markets; winners and losers are made every hour.
But Knight's losses were the result of an algorithm run amok — a new computerized trading program with a software glitch — and raises basic questions about the growing use of such programs and the benefits they deliver.
When the U.S. market opened on Aug. 1, a newly installed program in Knight's computers entered incorrect bids for about 150 stocks. Other companies, using their own computer programs, recognized the errors and began trading against Knight. The Knight bids pushed up the value of many stocks and the company lost money when it had to resell those overvalued shares at a lower (and more accurate) price. By the end of the day, the company had lost nearly half a billion dollars — a loss of $10 million a minute.