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Replies to post #8850 on KCG Holdings (KCG)
08/12/13 10:03 AM
08/20/13 9:34 PM
Knight Capital’s Software Glitch Costs it $440 Million
By Jeff Macke | Breakout – Thu, Aug 2, 2012 11:11 AM EDT
Wild stock price swings in the market yesterday are costing one trading firm a multimillion dollar headache today. Financial services company Knight Capital Group (KCG) has seen its stock price plummet another 50% today after announcing losses incurred due to erroneous trades entered on Wednesday morning. Nearly 150 stocks that trade on the New York Stock Exchange (NYX) experienced extreme price swings and unusually high volume due to the firm's computerized trades. Knight had to unwind the positions that it accidentally bought, causing the firm to take an estimated loss of $440 million --more than the company's second quarter revenue. Knight blames a faulty software installation for the mistake which has since been corrected. The entire event, which lasted for about 30 minutes, ended up costing the company roughly $10 million a minute.
The immediate reaction is to fret over another blow to the confidence of retail investors. Knight's blunder is being compared to the Facebook (FB) IPO and the Flash Crash of May 2010. But these comparisons wildly overstate what happened yesterday. Knight messed up and caused disturbing dislocations and huge volume spikes, but the key difference is that the problem was almost immediately identified and contained. Within an hour order had been restored.
Knight has been harshly punished for its mishap. The company lost over 30% of its value on Wednesday, another 50% today, and has been forced go hat-in-hand in search of a cash infusion or acquirer. Knight Capital is fighting for its survival. There isn't a regulatory body on earth capable of meting out justice with such merciless efficiency.
Markets need outside regulation. Left to their own devices traders will find the weakest participant and steal them blind. There are a million different reasons to be suspicious of equities, traders, banks, the exchanges and the largely impotent regulatory body attempting to police the entire marketplace. Rules are going to be manipulated and abused anywhere there's competition. There's a reason regulators exist, just as there's a reason they test for drugs at the Olympics; people break rules to win.
Knight's mistake and the fallout is, if anything, evidence of what's right about the free market; not a reason to be even more afraid.
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Goldman takes less risk, executives strike cautious tone
By Lauren Tara LaCapra
Tue Oct 16, 2012 2:15pm EDT
(Reuters) - Goldman Sachs Group Inc took less risk and earned less money from customers' trading last quarter, even as the Wall Street bank reaped big gains from the rising values of its stock and bond investments.
The bank's executives struck a cautious tone on a conference call with analysts, saying that events such as the U.S. presidential election and the European debt crisis will continue to weigh on earnings in the coming quarters.
"There is still so much political uncertainty out there that is driving markets, both for our clients and for us," said outgoing Chief Financial Officer David Viniar. "And in that environment, it is very hard to have conviction and very hard to take risk, both for our clients and for us."
Goldman's average daily value at risk - which represents how much money the investment bank could potentially lose in a day - dropped to $81 million, the lowest level in roughly six years.
Its return-on-equity, a key measure of how much profit a company can wring from its balance sheet, also remained low at 8.6 percent. That's below the 15 percent level that shareholders generally expect investment banks to earn in better times and far below the 30 percent or more Goldman posted just before the financial crisis.
"ROE's kind of skimpy, but that goes along with high capital and some softness in the business," said Regency Wealth Management portfolio manager Andrew Aran, who owns Goldman shares for clients. "It's going to be impossible to go back to 15 percent in this environment."
All told, Goldman earned $1.5 billion, or $2.85 per share, in the third quarter, compared with a year-earlier loss of $428 million, or 84 cents per share.
Last quarter included a charge to reflect the rising value of Goldman's own debt, which reduced earnings by $370 million. The third quarter of 2011 included the cost of buying back preferred stock from Warren Buffett, as well as losses on Goldman's stock and bond holdings.
Analysts on average had expected the bank to earn $2.12 per share, according to Thomson Reuters I/B/E/S.
Goldman's biggest business, trading, reported a 3 percent increase in revenue.
A sizeable portion of that trading gain was at the expense of Knight Capital Group, which nearly went bankrupt in August after losing $440 million because of trading glitch. Goldman bought a lot of the stocks that Knight had inadvertently acquired, at a steep discount.
Revenue from commissions and fees dropped 29 percent. What little client-driven trading took place was mostly lower fee products like stock and bond indexes.
Investment banking revenue jumped 49 percent from a very weak period a year ago, but the backlog of deals dropped slightly from the previous period.
An uncertain economic outlook "has weighed on the psychology of corporate leaders and investors," making them more hesitant to pull the trigger on deals, Viniar said.
The one bright spot of Goldman's earnings was its investing and lending division, which consists of stocks and bonds that Goldman holds as investments. The value of those assets rose during the quarter after the U.S. Federal Reserve unveiled a new program to boost liquidity.
That business generated $1.8 billion in revenue; a year earlier, it reduced overall revenue by $2.5 billion.
The sustainability of those earnings are in question, due to a regulation that limits large U.S. banks' ability to invest their own money and new capital requirements that punish banks for holding illiquid assets, like private equity and corporate debt.
Goldman is aiming to reduce its risk-weighted assets by $88 billion through 2015, some of which will come from the investing and lending division.
"The big takeaway from this quarter is that Goldman needs a stronger economic environment to have adequate returns on capital, rather than just the asset price rally," said Michael Wong, an equity analyst at Morningstar who covers the bank. "People are just kind of waiting for Goldman Sachs and other investment banks to start being positive."
Goldman shares rose 0.3 percent to $124.89 in afternoon trading.
The company also said it would lift its dividend for the second time in a year, which is unusual because Goldman has historically preferred to use capital to invest in businesses, or buy back shares.
Goldman will now pay shareholders 50 cents per share in dividends each quarter, up from 46 cents. Viniar did not rule out further dividend hikes in the future. He said much more of the bank's capital planning will revolve around share repurchases going forward. Goldman spent $1.25 billion buying back stock during the quarter.
Viniar also said that the bank has already finished most of a cost-saving program that aims to reduce annual expenses by $1.9 billion, by cutting staff and other non-compensation expenses. In fact, Goldman added 300 employees last quarter and paid out 44 percent of revenue in compensation, consistent with its payout ratio in the previous two quarters.
Goldman has set aside $10.97 billion for compensation so far this year, a 10 percent increase from a year ago. That equates to $336,442 per employee, up 15 percent from $292,836 per worker during the first nine months of 2011.
(Editing by John Wallace, Lisa Von Ahn, Matthew Goldstein and Andrew Hay)
Stock Option Trading Glitch Tied To Goldman Sachs
By Bloomberg News
Posted 07:04 PM ET
A programming error in Goldman Sachs Group's market-making business caused stock-option orders to be sent mistakenly to exchanges, roiling markets at the start of trading Tuesday, said a person briefed on the situation.
Clients expressed interest in certain options trades and the software mistook the indications for actual orders to send to exchanges, said the person, who asked not to be identified.
Some orders had default prices that were far from the market, he said. Any Goldman Sachs' (GS) loss depends on which trades are canceled by exchanges, he said. Goldman Sachs' stock was little affected, rising 0.6%.
The mishap comes about a year after computers run by Knight Capital Group flooded U.S. equity markets with erroneous orders, a mistake that almost put the market-making firm out of business. Goldman's error gives more ammunition to critics of America's electronic market structure, coming four months after the Chicago Board Options Exchange was shut down for more than three hours by a computer malfunction.
"It shows you the current status quo: The avant-garde technology is ahead of exchange systems," Greg Richards, who trades VIX and S&P 500 options on the CBOE floor as an institutional broker at Chicago-based PTR Inc., wrote in an email.
In an email, Goldman Sachs spokesman David Wells said any loss "would not be material to the financial condition of the firm."
At least three operators of U.S. options exchanges were reviewing trades that took place at the beginning of the day. NYSE Amex Options, a unit of NYSE Euronext (NYX), said most of the transactions may be canceled.
A "large number" of trades in tickers starting with letters H through L in the first 17 minutes were being examined, according to NYSE Amex Options. CBOE Holdings (CBOE), the largest venue, said it was looking at trades between 9:30 and 9:41 a.m. Nasdaq OMX Group (NDAQ) was reviewing options transactions from 9:30 to 9:47 a.m., according to its website.
About 240 September $103 put contracts for the iShares Russell 2000 Exchange Traded Fund traded at $1 at 9:32 a.m. New York time, down from as much as $3.32 two minutes earlier, data compiled by Bloomberg show. The next trade was executed at $3.27 at 9:33 a.m.
For the October $91 put contracts on the ETF, 993 options traded at $1 at 9:30 a.m., compared with 81 cents Monday. The next trade eight minutes later was for 15 contracts at 77 cents.
"NYSE Amex Options is reviewing a large number of erroneous executions that took place this morning," the exchange said in a note to traders. "As permitted by the rules, we anticipate that most of the impacted trades will be busted."
Read More At Investor's Business Daily: news.investors.com/business/082013-668226-options-trades-glitch-prompts-exchange-review.htm#ixzz2cYtjHlxX
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