Thursday, August 2, 2012

MSM, Knight Capital and the $440 Million Trading Loss

MSM journalists are once again falling all over themselves condemning computer trading after the Knight Capital trading fiasco, which resulted in losses for Knight of around $440 million.

Traders said they believe a large order for a number of stocks was executed in five minutes rather than a longer period of either one or up to five days. The far shorter transaction period pushed prices sharply higher or lower as the scale of the orders overwhelmed the natural liquidity of the market.

The damaged party here is Knight. It was a self inflicted wound. The winners were other traders, who had the opportunity to get out of positions at much higher prices, or to take on positions at much lower prices. This was a trading advantage to non-Knight traders in and around the loss range to Knight of $440 million.

Despite howls from MSM that the Knight trades will scare small traders away from the markets, it is actually the type of situation which shows that from time to time a small trader can pick the pockets of a major trader running on algorithms. The more often major traders do dumb trades, the more it is to the advantage of small traders.

I have been trading against major house trading errors, of one sort or another, for decades. It is just about the easiest money that can be made on Wall Street. I wish they occurred more often. MSM journalists are clueless (and it's probably why most of them are in favor of government central planning).

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