Since no one else took me up on my offer to remind us of Knights games.There were articles in August alleging nefarious shorting schemes revealed by Knights algorithms when they had their accident in August
The SEC is All Over These Two Cases… Right?
Second, Knight Capital Group Inc. It’s a powerhouse Wall Street firm.
You may not be familiar with it. But if you trade through any number of well-known retail brokerage firms (think TD Ameritrade, Fidelity, etc.), you probably have a connection to them, or rather, they have your number.
See, Knight has a big market-making operation. Big discount brokerage firms route their customers’ (you’re their customers) trading orders to Knight’s trading desk in Jersey City, New Jersey, so their market-makers can execute your orders.
Your big discount brokerage firm doesn’t have a market-making operation. They don’t take the other side of your trades. They don’t take trading risks. They re-route your orders to trading firms like Knight, who pays them for “order flow.”
That’s right. Knight pays your brokerage firm to get your orders sent to them.
Here’s the deal. The more order flow you see as a market-maker, as a trading desk, the more you can “see” in terms of where stocks might be heading. What you want to “see” is stuff like: how many shares are being bid for or offered at what range of prices? where are the stop-loss orders? what are the standing limit orders? and most importantly, what is the order flow telling you about momentum and trend?
Of course, today, human market-makers aren’t doing all that “seeing.” That would be hard in a world with billions of bytes of information constantly flowing. Computers do that now; they see what the naked human eye can’t see.
As far as those computers that see, the best of them reside over on high frequency trading (HFT) firms’ desks, or in their server rooms. They are looking at all the same kinds of order flow information that Knight looks at. They are even looking at Knight’s orders.
Well, it turns out that Knight, which is nothing more than a seemingly respectable HFT operation, had some trouble back in August when its new computer seeing-eye systems went haywire and cost the firm $461 million in errant trades. They’re still around because they got an infusion of $400 million from some saviors to not go belly-up.
Well, now some of those saviors want their pound of flesh from Knight. They want to buy Knight.
The two firms that last week surfaced as potential acquirers are Getco LLC and Virtu Financial LLC. And what do those two private firms do? Quick, see if you can guess. Okay, time’s up. They are high frequency trading firms.
Both of them have private equity backers. Blackstone, which also ponied up money to bail out Knight, is a Getco backer, and private equity powerhouse Silver Lake Partners is a Virtu backer. Another private equity firm, General Atlantic LLC, also ponied up money to backstop Knight, presumably to ultimately get into the HFT game, if it isn’t already.
Now, the SEC is still investigating Knight over its August fiasco and looking hard at how the HFT crowd got all its preferential access to the exchanges and what good or bad they do. (Hint, hint, to you SEC clowns, you let the dogs out!) So, let’s just see if the SEC is going to let a private HFT operation with private equity money and clout behind it buy Knight and turn what’s left of the public’s order flow into the private seeing-eye dog of one of the Street’s big insider Dogs.
This is going to be interesting.
Shah
