Knight Capital losses spur focus on algo risk management

Losses suffered by Knight Capital as the result of a rogue algorithm have again focused attention on the risks involved in automated trading. With algos expected to be used more widely in over-the-counter markets in the near future, how are market participants and regulators seeking to keep machines under control? Clive Davidson reports

When a rogue algorithm racked up $440 million in losses for Knight Capital on August 1, other firms involved in automated trading looked in the mirror. “Management wanted to know whether the same thing could happen here,” says the head of electronic trading at one large UK bank, wearily. “So we reviewed the controls, double-checked our monitoring processes and came to the conclusion that it couldn’t.”

Knight Capital probably thought the same. The firm was no algorithmic novice, nor was it