The headline news of last week was the debacle at Knight Capital. Knight is not exactly a household name but each and every one of our clients as well as the vast majority of investors has done business with Knight in the past. Knight Capital is the single largest market maker for retail transactions. Fidelity, Vanguard, Scott Trade, Schwab and TD Ameritrade all route orders to Knight so this means many of your orders are being bought from or sold to Knight on the other side. Knight helped spearhead online trading in the late 1990’s and I (Robert) have had a close relationship with Knight at many points throughout my career. From personal experience I can tell you that they are the most ethical and reliable market maker I have ever dealt with. This is why it saddened me to see the error that nearly put the firm out of business. Evidentially a new system that was being implemented at the NYSE which was supposed to link up with Knights new software malfunctioned (reportedly due to Knights error) and cost the company over $400 million in just a matter of minutes. It’s important to know that no client or counter party lost a penny. Knight immediately closed out the trades and took the loss. I applaud this swift and decisive risk management decision in a time when commons sense has lacked in this respect.
Today news came out that a group led by TD Ameritrade, Getco and Stifel Nicolaus bought $400 million of preferred securities that will more than likely be converted in short order. Knight will be here to stay it appears but this reminds us that computers indeed are fallible. For the average investor this underscores the importance of a human designed and managed investment and risk management process. Most importantly in a market place where computers make a vast majority of the volume, mechanical orders such as stop orders and good to cancel orders that sit out in space could be detrimental. Just think of the flash Crash in 2010 imagine selling your entire portfolio for 50% less than the previous day only to see it close down a percent or two? This reaffirms our belief that black box trading and high frequency trading eventually blows up and most investors are best served sticking with the basic principles of thorough research and prudent risk management all of course orchestrated by the hand of human beings. I spoke briefly about Knight on Fox Business last Friday on Fox. That link should be on our website under about us and in the media at www.svwealth.com in the next couple days. Have a great week and stay cool!