Knight Securities loss of $440 million this week was attributed to a "glitch" in a new trading software release. Rumor has it that a disgruntled computer took over, hid or disabled the abort button, and sent out massive market orders causing the firm to lose $10 million per minute for almost 44 minutes, putting Knight into almost instant insolvency. The term "glitch" according to Webster's dictionary, is deemed to be "a minor or temporary setback", not a potential death blow. This categorization of Wall Street incompetence is reminiscent of the recent JPM trading loss of what is now over 7 billion as it was initially referred to as "Tempest in a Teapot" by Jamie Dimon, one of the worlds most highly regarded CEO's.
Drilling down to those details, it turns out that highly leveraged OTC (no clearing house involved) credit default swaps were marked to the market only once per month. Furthermore, the monthly settlement price was determined by the group placing the trades. So it took virtually forever to expose huge loses. In the span of just a few months we have JPM, MF Global, PFG and Knight Securities screw-ups making headlines so it's not surprising that tens of billions of dollars continue to move out of Equities and into US Bonds where the next bubble has formed.
Divorced from reality, markets have ignored both fraud and incompetence that is running wild in Wall Street. It's obvious that there is no adult supervision. The old market adage coined by John Maynard Keynes "the market can remain irrational longer than one can remain solvent" is still true.
By the end of the week, a strong jobs report in the US sent the equities markets to recent highs, indicating surprising resilience by easily digesting the recent explosive move up based on unfounded comments made by Draghi, head of the European Central bank. After an extended travel schedule, the weekly video is back.
By Keith Schneider