Market Participant Behind Rogue Algo Lost a Fortune!

In the case of this morning's "mayhem algo," hopefully there will be sweet justice. Without a doubt, the firm that was behind it, and by all accounts it was Knight Capital KCG, is going to suffer catastrophic trading losses. This algorithm, which sold some stocks relentlessly, while buying millions of shares of other stocks, with no reasoning whatsoever, lost an absolute fortune. Currently, speculation is that as many as 150 or more stocks were effected. As an example of the kind of losses that this type of computer trading could have generated today, take a look at a little stock called China Cord Blood CO. No one gives a shit about this stock, rest assured. It has a market-cap of $180 million and is a piece of garbage that has lost 62% since January 2010. Well, today, thanks to the "mayhem algo," China Cord Blood shares jumped something like 150% as this computer program bought the stock relentlessly. Millions upon millions of shares were traded. Normally, around 131,000 shares of CO trade each day. Shares opened at $2.49 at 9:30 EST. By 9:56, this stock was trading at $6.20. Obviously this wasn't an accurate reflection of China Blood Cord's CO real value, seeing as the stock is a piece of garbage, as mentioned earlier. The firm that was behind the rogue algorithm, however, bought the stock from $2.49 all the way up to $6.20, or thereabouts. Once the actual market came back into play, you know, human beings, CO shares fell back to around $2.50, where they were last trading. If you are long a stock at $6.00, and it goes back to its natural value, below $3.00, in a matter of minutes, you are in big trouble. Now, keep in mind that this exact scenario happened in at least 150 stocks. On a percentage basis, in most of the effected stocks, the losses weren't nearly as bad as they were in CO. The algorithm, however, was buying (or selling) much larger blocks of stock, on a dollar basis, in the more heavily traded symbols, such as Pepsi PEP and Best Buy BBY, for example. Here is the bottom line: Any way that you cut it, the firm behind this algorithm not only screwed or enriched a large number of other firms and traders on a completely arbitrary basis, but they just easily lost themselves hundreds of millions of dollars. Readers should also ponder how in the world a computer program such as this could run wild in the U.S. capital markets for up to a half an hour? The high in CO was put in at 9:56 EST, before the stock reverted back to its true value. Unfortunately, the only conclusion that can be drawn is that there are literally no carbon-based overseers running many of the most prolific trading systems in this robot market anymore.