Ever since the Knight Capital trading disaster broke in August 1, 2012, investors and traders have been morbidly fascinated by the incident. How had so sophisticated a company managed to burn though $440 million in a bit more than half an hour? How could the firm endure the bleeding for what amounted to years in electronic trading? Some of us could imagine ourselves among the members of the management team in those tragic minutes; others found an unimaginable relief in watching the financial tragedy unfolds in front of their eyes and not inside their own firms.
It became known that it was an experienced team that failed to successfully uninstall a piece of software that contained mistaken code. From the start, therefore, it was evident that we were witnessing an almost Shakespearean drama for the more than a thousand employees and countless shareholders who were afraid of the potentially fatal consequences. As for Thomas Joyce, the chief executive officer, what sort of man lay behind that receding hair, and how did he cope for so many hours with the psychological pressure of managing the rescue of a failed giant from sure death? “Knightmare on Wall Street,” by Edgar Perez, the celebrated author of “The Speed Traders”, makes for riveting reading as it covers all these dimensions. Although there is much that we can never know, his book comes closer than other reports have to answering most of our questions.
Knight’s story has by now been told and retold many times, in newspapers and magazines, on business television and in several reports. Founded by pioneers Ken Pasternak and Walter Raquet, the firm quickly reached unimaginable heights in the late 90s. Later Knight entered into a period of ups and downs through the 2000s under Joyce. The type of incident that afflicted the company on August 1 was a risk factor watched by neither management nor the board. Operational risk, Perez claims, hides behind seemingly sophisticated IT departments and shrinking budgets to surface when you least expect it.
“Knightmare on Wall Street” is a superlative account of the coming‐of‐age of high frequency trading, and the definitive chronicle of Knight Capital’s impressive ascendancy and lightning toppling. Perez takes the reader on a riveting journey while providing a record of verbatim verbal exchanges between the major players, as their personalities, decisions, ambitions and indecisions send ripples throughout the financial markets. Heroes, villains and human fallibility populate this true story as captured by the author’s keen insight and imaginative presentation.
Perez has been covering the Knight Capital tragedy since it was initially exposed in headlines in the tragic summer morning of 2012. He probably knows more than anyone outside the IBM and PricewaterhouseCoopers teams that were charged with conducting the autopsy about the mechanics of the incident. As a consequence, in “Knightmare on Wall Street” he is able to add significant detail to the story.
Perez’s story holds us not because of the absorbing details of the incident, but because of its human dimension. “Knightmare on Wall Street” begins by reconstructing the events of that grim morning during which the firm begun spewing orders and scaring traders on the floor of the New York Stock Exchange on the day of the launch of the Retail Liquidity Program. Top managers, including Steven Sadoff and Michael Tobin, failed to act decisively in the absence of their CEO. Perez clearly does not believe that they were ultimate responsible in the extraordinary failure. But in Perez’s telling, they should have known better, much better.
Perez takes the reader on a riveting ride through trading rooms where the personalities of the major players are revealed. “Knightmare on Wall Street” is certain to become a seminal classic among the pertinent Wall Street literature, alongside such heavyweight tomes as Barbarians at the Gate, Liar’s Poker, When Genius Failed and Den of Thieves. It is not merely a compelling and essential text for anyone who wishes to comprehend the climate of algorithmic trading, or anyone who wants to gain insight into the future evolution of financial markets and its discontents. This is a highly recommended read for anyone desiring the inside scoop about today’s electronic and high-frequency trading.