KCG Holdings' (NYSE: KCG) broker-dealer subsidiary, Knight Capital Americas, has agreed to pay $12 million to the Securities and Exchange Commission in order to settle charges surrounding Knight Capital's August 2012 trading malfunction. During the incident, millions of shares were erroneously traded, which cost Knight $440 million and temporarily disrupted the markets.
The SEC said this financial resolution marks the first time the SEC has enforced its market access rule, which went into effect in 2010 and "requires brokers and dealers to have risk controls in place before providing their customers with access to the market." After an investigation of the Aug. 1, 2012, event, the SEC found that Knight Capital failed to prevent millions of erroneous orders from being placed because it did not have adequate risk management controls in place.
According to Daniel Hawke, the SEC's chief of the Enforcement Division's Market Abuse Unit, "Brokers and dealers must look at each component in each of their systems and ask themselves what would happen if the component malfunctions and what safety nets are in place to limit the harm it could cause. Knight Capital's failure to ask these questions had catastrophic consequences."
Since August 2012, Knight has merged with Getco Holding Company. On the day of the SEC announcement, Its stock rose from $8.42 per share to $8.50.
