Knight Has Generator Power, ETF Trade OK

November 01, 2012

Knight is back up after its power outage—even if the ETF market barely blinked.


Knight Capital, the biggest ETF market maker, is back up and running today, handling clients’ needs without problems after it had to reroute order flow because a backup generator failed yesterday, the first day of trade after U.S. stock markets were closed by Hurricane Sandy.

Knight is again functioning on generator power, though it hopes to regain regular electrical power soon, as more of Jersey City, N.J., where it is based, returns to normal service, according to Reggie Browne, a managing director at Knight.

The generator the trading firm had set up to prepare for yesterday’s market reopening failed at around 11:45 a.m. Eastern time, according to Knight.

While the idea of the biggest player in the ETF trading traffic being out of service may seem a threat to smooth order flow, market sources said the rerouting process went smoothly. IndexUniverse Director of Research Dave Nadig hammered that point home clearly in a piece examining how ETF trading spreads were largely unaffected by Knight’s sudden absence.

“The market survived a day and a half without them a few months ago, and it was the same thing this time,” said one ETF trader, referring to a previous technology meltdown at Knight over the summer that caused a multitude of electronic trades to go off in minutes and that nearly bankrupted the firm.

Knight, which lost $440 million because of that glitch in late July, saw its stock price slip nearly 2.5 percent Wednesday on just ahead of the close. It shares had been down by as much as 4 percent. By comparison, the Dow Jones industrial average was a touch lower.

Today, the Dow bounced 1.25 percent higher on news showing U.S. and Chinese manufacturing grew last month, and on a private report suggesting that official U.S. employment growth was decent, if not stellar, last month.

Traders said that liquidity in the markets was good all day, save for perhaps the opening part of the session, when it appeared some high-frequency traders were pulling punches so as not to be the first to show their hands too aggressively.

“It was fairly orderly,” said Paul Weisbruch, an ETF trader at King of Prussia, Pa.-based Street One Financial, referring to the effects of Knight’s storm-related shutdown.

“The good thing about the market as it pertains to ETFs is that no one party is leading the market,” Weisbruch added, noting that while Knight is the No. 1 market maker, plenty of firms stand at the ready to pick up extra order flow, and the technological infrastructure makes it easy for clients as well as trading firms to fill any gaps.

Pent-up trading demand from players—quite a few of them being institutions—that had to wait out the two days of suspended trading to carry out portfolio management tasks such as end-of-month rebalancing—was readily met, even without Knight Capital in the traffic.

It’s hardly a surprise that problems such as Knight’s emerged after Hurricane Sandy, which wreaked major havoc in places like New York City and coastal New Jersey.

The storm left about 8 million without electrical power and killed more than 118 people, including 50 in the United States.


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