Monday, August 06, 2012

1053 The Dark Knight Falls

1053 The Dark Knight Falls

No worries.  It’s not about the latest Batman movie.  This Dark Knight isn’t rising any time soon.

Knight Capital Group.  Rebels without an off switch.  The company that single handedly threw the markets into chaos and put itself in peril, and maybe a lot of investors -- job creators, if you will -- in danger.  Not the kind of danger you get by going to a midnight movie in Aurora, Colorado, or a Sikh temple in suburban Milwaukee.  But danger, nonetheless.

Here’s what happened:  Knight made a new computer program to speed trading.  They put it on line as of the opening of the markets on Wednesday, August first.  The software went bananas and resulted in what the company website calls “numerous” erroneous trades.

There’s no firm figure on “numerous.”  But selling back the numerouses their software erroneously bought for them has cost them in the neighborhood of US$400 million in losses.  And Knight is no pipsqueak.  They account for 17% of all the trading on the NYSE and almost as big a percentage on NASDAQ.  That’s more than 85 million shares a day!  They are -- or were -- the biggest of the bigs, even though we peasants may never have heard of them.

So, let’s say you go to the supermarket and buy a week’s worth of stuff.  When you get home, you notice that everything -- EVERYTHING -- is spoiled or beyond the sell-by date.

You could return it all and scream for your money back, which you might or might not get.  Or you could simply find another grocery store.

Well, that’s exactly what lots of Knight’s customers have done.

The software malfunction, which lasted all of half an hour, cost them a lifetime of good will.  Amazing how much damage you can do in just a few minutes.

Knight immediately set out to find a “White Knight” to bail them out of this mess and by the time you read this, the Blackstone Group will have extended a 400 million dollar helping hand.  But the brand is tainted.  So, Blackstone and its partners (TD Ameritrade, Getco and Stifel Nicolaus) get to buy in cheap.  For you stockies, Knight (NYSE: KCG) had been trading at about 15 most of the year.  It closed at about 4 on Friday.  The paper securing the bailout will let these buyers in at $1.50 a share.

In a completely unrelated news item on fashion and software, Marissa Mayer, the new CEO of Yahoo, quoted in the New York Times, says “Designing software... isn’t all that different from designing clothes.”   Yeah it is.  And even at today’s high prices, no dress ever caused the loss of 400 million dollars (and counting.)


--While on this topic, there are a lot of folks out there who still confuse the Dow Jones “Industrial” Average with the general health of the market.  That never was true, and it’s less true now than ever.   Especially in an era where 30 minutes of stupid trades can skew the whole thing and in an era where “long term” is measured in minutes, hours and days and not years or decades.

--Industrial is in quotes because only 13 out of the 30 components are actually industrials and to reach that number, you have to count oil and chemicals.  There are five companies in food or retail, four banks or other financials, three in pharmaceuticals,  two in software, two in telephone service, and one in entertainment/broadcasting.

--The Romney Robots Remind:  “you lib-rulz don’t mind voting for a rich guy if his name is Kennedy.”  Right.  But old Joe and his sons knew you had to give back, something lost on Bain.  So when you vote for a Kennedy you’re voting for a good fifth of Scotch and people whose decades of legislation and public service actually DID create American jobs without sending them overseas, and for a family that pays its taxes instead of hiding its money in the Caymans.

I’m Wes Richards.  My opinions are my own but you’re welcome to them. ®
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© WJR 2012

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