Preview

KnightCapitalGroupCaseStudy

Powerful Essays
Open Document
Open Document
1728 Words
Grammar
Grammar
Plagiarism
Plagiarism
Writing
Writing
Score
Score
KnightCapitalGroupCaseStudy
Knight Capital Group Case Study
Knight Capital Group, a financial services firm engaging primarily in market making, was founded in 1995 by Kenneth Pasternak and Walter Raquet. A market maker is a company that stands by to buy and sell financial instruments while hoping to make a gain from the bid-offer spread. Using high frequency trading algorithms, Knight was once the largest trader in U.S. equities.
High frequency trading (HFT) algorithms started in 1989 when Steve Swanson worked together with Jim Hawkes, a statistics professor, to program algorithms, predictive formulas for the stock market that were designed by Jim’s friend David Whitcomb, who taught finance at Rutgers University. The idea was to create a mechanical trading system that could predict the direction of a stock and act in a fraction of the time it would take a human. This would be a prime example of extremely efficient technology dethroning the human as master of his domain. In fact, it worked best on the NYSE where trading was still done in person.
Here’s how it works, the algorithm predicts the next move. The system would then buy stocks on one of the exchanges that were selling below the predicted value and then sell it a split second later at the higher value and gain from this arbitrage. They could even buy and sell on the same market when a stock was predicted to climb. Or sell then buy if the stock was falling and they intended to short the market. In mere fractions of a second, the system would then adjust where the price point should be and continue trading.
Historically, you can make money in the market by intelligently riding the market volatility or being a market maker. HFT effectively changed the market completely. If a stock was too high, the algorithm would automatically sell off the shares, if a stock was selling too low, it would buy. However, if something goes wrong with using high frequency trading algorithms as in the case with Knight Capital Group where it was on the



References: Shaked, Israel, and David Plastino. "Soft Capital, Hard Times." American Bankruptcy Institute Journal 31.9 (2012): 44,45,92. ProQuest. Web. 10 Nov. 2013. Scannell, Kara. "Mishap Puts SEC 's Role Under the Spotlight." Financial Times: 15. Aug 23 2013. ProQuest. Web. 10 Nov. 2013 . Gallaugher, J. (2012) Information Systems: A Manager’s Guide to Harnessing Technology.

You May Also Find These Documents Helpful

  • Better Essays

    Stock Project

    • 1113 Words
    • 5 Pages

    The “Stock Market” is a term that actually describes several markets such as the New York Stock Exchange NASDAQ, where the stocks of companies are traded. Shares in a company are sold and the shareholders then become part owners of the company. Offering shares of stock raises money for continued research and development of company products or services.…

    • 1113 Words
    • 5 Pages
    Better Essays
  • Powerful Essays

    (EMH) refers to share price movement with respect to available information and thus no trader will be presented with an opportunity of making supernormal profits (except by chance), therefore their profits on a share will reflect the riskiness associated with that shares (Pike and Neal 2009). However, “detailed investigations using advanced econometric techniques, larger data sets, increasingly powerful computing ability, and alternative theoretical models have in the last few years revealed a range of anomalies when the unpredictability-of returns hypothesis is tested. Financial markets are often predictable to some extent, but the crucial question is whether this predictability can be exploited to make excess profits from trading in the markets‖ (Mills 1992, as cited by Coutts, 2000, p.579).…

    • 3467 Words
    • 14 Pages
    Powerful Essays
  • Powerful Essays

    Bernie Madoff Scandal Essay

    • 3875 Words
    • 16 Pages

    Ronnie Ambrosino speaks to the performance of the SEC, “I believe that the SEC is totally at Fault. It was as if [Madoff] was given the red carpet to rob you and the government gave [Madoff] the gun. If I did my job the way the SEC did theirs, I would not have a job.” (Dodge 20).…

    • 3875 Words
    • 16 Pages
    Powerful Essays
  • Good Essays

    Stock Market Game Report

    • 564 Words
    • 3 Pages

    In the beginning of the game I had no idea of how to do business in stock market so I started watching real stock market news on TV and reading articles about how to trade. First, I started trading with popular stocks without paying attention to the price and changes. As time passed, I realized the changes in stock market and stocks were making loss. However, some of them were making profit by fortune. I was buying and after a…

    • 564 Words
    • 3 Pages
    Good Essays
  • Good Essays

    Flash Boys Essay

    • 1020 Words
    • 5 Pages

    At the end of the day, traders formerly in charge of making arbitration, those that used to seek to reward their customers or that provided liquidity to the markets ,for example, have been in many ways overtaken by a technology that can do the same much faster and at a lower price to the investor. It is not surprising that the majority of critics high frequency trading has gathered in the world of Wall Street do not come mainly from investors but from competitors that have become obsolete. Critics, of course, have also good arguments against high frequency trading. Some of them, as described by Brad, include the anticipation of movements from other traders, hindering their operation and costing them money. As Lewis describes it ,it is a legalized front-running. Another argument is that these provide instability in the system, such as creating a possible flash crash. And finally, flash trading or the fact that some exchanges allow high frequency trading to read commands from other participants microseconds before these become public, allowing them to be the very first to…

    • 1020 Words
    • 5 Pages
    Good Essays
  • Powerful Essays

    Denis, D J. (2011) Financial Flexibility and Corporate Liquidity. Journal of Corporate Finance, 17(3), 667-674.…

    • 2215 Words
    • 10 Pages
    Powerful Essays
  • Powerful Essays

    Stocktrak Report

    • 2371 Words
    • 10 Pages

    Monday, September 10, 2012, I started Stock-Trak, an online portfolio game. Stock- Trak allowed me to gain hands on experience testing different investment strategies in a risk-free, yet realistic environment. From September 10 to November 16, 2012, I took part in one such simulation by managing an online Stock-Trak portfolio. I was given an initial amount of $100,000 pretend cash with which to invest. All monetary decisions were at my discretion. This paper discusses my trading experience , my portfolio’s performance, the strategies used during the simulation, what I learned in the process, and how I will implement the knowledge gained from the simulation in future investments.…

    • 2371 Words
    • 10 Pages
    Powerful Essays
  • Better Essays

    In the article, Death on the Prairies: The Murderous Blizzard of 1888 by David Laskin, which analyze the severe and tragic event that happened over the Northeast continent of American. In January 12, 1888, began as inconvenient warm morning across Nebraska, Kansas, Iowa, territory of Dakotas, and Minnesota. Prairie snowstorm of blizzard killed hundreds of recently immigrant that comes to west in search prosperous new life. The account of the blizzard of 1888 are amazed, and shocked event. By Friday the thirteenth, hundreds of people were killed from this suffrage. Nobody had any idea that the atmosphere would immediately capable of changing and storm. This days known as “the Schoolchildren Blizzard.” The factors…

    • 1170 Words
    • 5 Pages
    Better Essays
  • Satisfactory Essays

    The stock market simulation has been a wonderful experience for me as a student in economics and as a person in today’s society. Knowledge gained in this project will give me the advantage to wisely choose the correct stock when I start investing my own money into the stock market. Different aspects of the simulation provided innovative and diverse ideas to propel me familiarity further into the grand realm of economics.…

    • 480 Words
    • 2 Pages
    Satisfactory Essays
  • Good Essays

    Great Depression

    • 2042 Words
    • 9 Pages

    The wealthiest had the ability to manipulate a stock to by pooling to inflate the price to make it appealing to the everyday investor and as the everyday investor was buying into the company the price manipulators were selling off their shares and enjoying the climb along the way. The manipulation was often done through increased share activity as well as false positive publicity. By the time the stock hit its peak the original pool manipulators had sold off their shares and all of the everyday shareholders that had been duped into their shares got to ride the stock back to its real market price. What…

    • 2042 Words
    • 9 Pages
    Good Essays
  • Powerful Essays

    Case Yell Group

    • 4403 Words
    • 18 Pages

    * The Yell Group has a well-established position in a growing market generating stable revenue streams that are reasonably recession proof.…

    • 4403 Words
    • 18 Pages
    Powerful Essays
  • Better Essays

    Standard deviation is a number that indicates how much on average each of the values in the distribution deviates from the mean (or center) of the distribution. Bollinger Bands, created by John Bollinger in the 1960s, is an indicator that uses this statistical measure to determine support and resistance levels. This indicator consists of three lines and is very simple to derive; the middle line is a simple moving average of the underlying price data and the two outside bands are equal to the moving average plus or minus one standard deviation. Based on theory, two standard deviations equates to a 95 percent confidence level. In other words, 95 percent of the time the values used in our sampling fell within two standard deviations of the average. Initially, Bollinger Bands were used to determine the boundaries of market movements. If a market moved to the upper band or lower band, then there was a good chance that the market would move back to its average. We have carried out numerous tests on this hypothesis and seemed to always come back with failure. Instead of using the upper band as a resistance point, we discovered, as others have, that it worked much better as a breakout indicator. The same goes for the lower band. The Bollinger Bandit uses one standard deviation above the 50-day moving average as a potential long entry and one standard deviation below the 50-day moving average as a potential short entry. This system is a first cousin of King Keltner. They are similar in that they are longer-term channel breakout systems. However, this is where the similarities end. Instead of simply liquidating a position when the market moved back to the moving average, we concocted a little twist to this exit technique. From observing the trades on the King Keltner, we discovered that we gave back a good portion of the larger profits waiting to exit the market at the moving average. So, for the…

    • 1412 Words
    • 6 Pages
    Better Essays
  • Good Essays

    The way the stock market works in the world today is if there is a Stock (Piece or share of a company) that are being bought out by a lot of investors, the price of the stock will increase extraordinary high. If the stock does not get bought, the price of the stock will lower to a cheaper price. To buy the best stock that will soon be more valuable is a race as brokers try and fight to find the potential grossing stock and buy tons of them at a cheap price to later on earn tons of money as it becomes more valuable to invest and sell as the stock value increases and grosses.…

    • 1142 Words
    • 5 Pages
    Good Essays
  • Better Essays

    Immediately, Bitcoin Code began trading. I didn't even have to watch it, and it kept making trades over the next day. By the time I remembered to check my account the next day, I had…

    • 1473 Words
    • 6 Pages
    Better Essays
  • Powerful Essays

    Tyioo

    • 1541 Words
    • 7 Pages

    Day traders buy and sell stocks throughout the day in the hope that the price of the stocks will fluctuate in value during the day, allowing them to earn quick profits. A day trader will hold a stock anywhere from a few seconds to a few hours, but will always square off all of those stocks before the close of each day. The day trader does not own any positions at the close of any day therefore immune to overnight risks. The objective of day trading is to quickly get in and out of any particular stock for a profit on an intra-day basis.…

    • 1541 Words
    • 7 Pages
    Powerful Essays

Related Topics