History’s Biggest Software Fails!

Software bugs can often have dire consequences, as we’ve noticed time and again on History’s Biggest Software Fails. While we’ve covered everything from virtual pandemics to devastating medical consequences, a sector that is often affected due to malfunctioning software is finance. Today, we investigate how a software bug was able to cost a company $440 million in losses in approximately 45 minutes.

The Knight Capital Group Fiasco

In early June 2012, the Security and Exchange Commission granted the New York Stock Exchange (NYSE) permission to launch its Retail Liquidity Program (RLP). It was designed to always offer individual investors the best prices, even if it meant directing trades away from the NYSE and onto a dark market. The RLP was scheduled to go live on the 1st of August. Unfortunately, due to time pressure, trading houses had approximately a month to quickly create code in order to incorporate the new feature into their regular processes. The code was a high-frequency trading algorithm programmed to buy and sell large amounts of stock in short periods of time.

Knight Capital Group, an American global financial services firm involved in market making, electronic execution and institutional sales and trading, encountered an unpleasant surprise on the 1st of August, 2012. In the first 45 minutes of trading, the code, known as Power Peg, malfunctioned causing Knight Capital to create a major disruption in price for 148 companies listed in the NYSE. In addition, the defective Power Peg code sent millions of child orders, resulting in 4 million executions in 154 stocks at over 398 million shares. Thus, Knight Capital’s stock took a pre-tax loss of $440 million lowering shares by over 70%.

The result was devastating for the financial services firm, which was now teetering on the brink of bankruptcy. Still, by Saturday the 5th of August, Knight Capital Group was able to raise $400 million from a group of investors, which managed to keep it afloat, albeit shifting control of the company from its current management to its new creditors. The incident not only devaluated the company’s stock by a staggering amount, but also created somewhat of a public scandal for then CEO Thomas Joyce, who was an open critic of NASDAQ’s handling of Facebook’s IPO.

Finally, Knight Capital Group suffered from what is known as one of the most expensive software bugs to date. The losses from a monetary standpoint were overwhelming and the firm’s image was put to the test in an industry where public perception can be a key factor for a company’s success, considering the sensitive nature of financial services. The malfunctioning code is often attributed to the short time period that the code was created, leaving no room for proper software testing. As always, this software fail is yet another example of why rigorous testing is such a vital step to the development process.

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