September 11, 2012 / 1:07 PM / 6 years ago

Knight hires IBM to review August trading glitch

Knight Capital traders work at the company's kiosk on the floor of the New York Stock Exchange, August 6, 2012. REUTERS/Brendan McDermid

NEW YORK (Reuters) - Knight Capital Group Inc KCG.N has hired International Business Machines Corp (IBM.N) to look into the August 1 trading glitch that cost the trading firm $440 million and forced it to accept a $400 million investment from a group of financial companies to keep it afloat, the company said on Tuesday.

IBM began a third-party review of Knight’s product development lifecycle processes on August 27, the company’s chief executive, Tom Joyce, said at the Barclays Global Financial Services Conference in New York.

Joyce said IBM would report its findings to Knight’s board of directors in the autumn. Knight’s risk management committee is also looking at taking a number of steps to prevent another such technical mishap, he added.

Knight is one of the largest executors of stock trades in the United States. Joyce said volumes at Knight had largely returned to levels seen prior to the trading glitch.

Knight’s crisis occurred when old software that was supposed to be dormant went live and began interacting with new software, flooding the New York Stock Exchange with unintended orders for dozens of stocks, Joyce said.

“In effect, we kicked the bee hive,” he said at the conference.

That left Knight with an outsized position that it had to sell off in order to keep operating within its capital requirements, Joyce said.

As of August 31, Knight had about $510 million in cash and more than $200 million in excess of its regulatory capital requirements, Joyce said.

The group of investors in Knight after the glitch included Blackstone Group (BX.N), Getco and financial services companies TD Ameritrade AMTD.N, Stifel Nicolas (SF.N), Jefferies Group Inc (JEF.N) and Stephens Inc (STEC.BK).

Reporting By John McCrank; Editing by Gerald E. McCormick and Maureen Bavdek

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