Insights.

On August 1st, 2012, Knight Capital suffered a major trading error caused by a faulty algorithm on server NO.8. Early at 08:01 a.m. EST, Knight personnel received 97 emails about an issue with SMARS (Smart Market Access Routing System) but didn’t act as these messages weren’t high-priority.

At 09:30 a.m., when U.S. stock markets opened, SMARS began handling massive daily orders. While the first seven servers operated normally, server NO.8, with the defective algorithm, began rapidly generating “child” orders without confirming executions from other trading venues. This led to 4 million executions across 154 stocks in just 45 minutes, representing over 50% of Knight’s daily volume.

At 09:34 a.m., NYSE analysts detected the abnormal trading volume, traced it back to Knight, and alerted the company. However, Knight had no documented response procedure. The IT team incorrectly reverted server NO.8’s code and replicated it across all servers, spreading the issue.

Knight finally shut down SMARS at 09:58 a.m., but by then, it had accumulated unintended positions totaling $3.5 billion long and $3.15 billion short, resulting in a $400 million loss. Goldman Sachs stepped in to buy Knight's unwanted positions, but the blow was severe. Knight Capital was acquired by rival Getco LLC the following year, in 2013.