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# Knight Capital Lost $460 Million in 45 Minutes After a Software Update Reached Seven of Its Eight Servers. The Code Still Running on the Eighth Had Not Been Used Since 2003.
- URL: https://whywecanthavenicethings.info/knight-capital-eighth-server-power-peg/
- Published: 2026-10-05T10:00:00.000Z
- Updated: 2026-10-05T09:59:59.000Z
- Author: The Complaints Department
- Tags: Corporate Memo

On 1 August 2012, the New York Stock Exchange launched its Retail Liquidity Program, a new way of handling small orders from ordinary investors. Knight Capital Americas, a broker-dealer in Jersey City, wanted its customers to be able to take part. Knight was not a small participant. According to the Securities and Exchange Commission, its trading through 2011 and 2012 generally represented about ten percent of all trading in listed US equities. Its automated router, called SMARS, took large "parent" orders from elsewhere in the firm and broke them into "child" orders for the market, and was by itself responsible for about one percent.

That morning, while processing 212 small retail orders, SMARS sent millions of orders into the market over roughly 45 minutes. It obtained more than 4 million executions in 154 stocks, for more than 397 million shares. When it stopped, Knight held a net long position of about $3.5 billion in 80 stocks and a net short position of about $3.15 billion in 74 others, none of which it had meant to buy or sell. The SEC put the eventual loss at more than $460 million. The New York Times calculated it at about $10 million a minute.

## The Flag

The new program needed new code in SMARS. According to the SEC's order, that code was meant to replace unused code for a function called "Power Peg", which Knight had stopped using in 2003\. The code had never been removed. It was, in the SEC's words, still "present and callable". The new code also "repurposed a flag that was formerly used to activate the Power Peg code." The plan was that when the flag was set to "yes", the new functionality would run instead of the old one.

There was a further complication, dating from 2005\. Power Peg had included a counter that tracked how many shares of a parent order had been filled and told the router to stop sending child orders once the order was complete. In 2005, two years after Power Peg went out of use, Knight moved that counter to an earlier point in the code. It did not retest Power Peg afterwards. Nobody had any reason to. Nobody was using it.

## The Eighth Server

Knight began deploying the new code on 27 July 2012, a few servers at a time on successive days. SMARS ran on eight servers. One of Knight's technicians did not copy the new code to one of them. Knight did not have a second technician review the deployment, and, the order notes, it "had no written procedures that required such a review." Other groups at Knight did have written deployment procedures. The SMARS group did not.

On 1 August the seven updated servers handled the new orders correctly. On the eighth, the repurposed flag did what it had last been asked to do, nine years earlier. It woke Power Peg. With the counter moved, Power Peg could no longer tell that an order had been filled, so it kept sending child orders, in rapid sequence, for every parent order it received. Another part of Knight's system did recognise that the orders were complete. That information was not passed to SMARS.

The effect on prices was immediate. For 75 stocks, according to the SEC, Knight's executions made up more than 20 percent of trading volume and contributed to price moves of more than five percent. For 37 of those, Knight was more than half the volume and the price moved more than ten percent.

## Ninety-Seven Emails

Knight had, in a sense, been told. From about 8:01 a.m. Eastern, an hour and a half before the open, an internal system began generating automated messages called "BNET rejects" that referred to SMARS and described an error: "Power Peg disabled." Ninety-seven of them went to a group of Knight staff before the 9:30 a.m. bell. The SEC found that Knight "did not design these types of messages to be system alerts, and Knight personnel generally did not review them when they were received." They were not used to diagnose the problem after the open either.

The firm's main risk tool was not much more forthcoming. The order describes PMON, a position monitor that "relied entirely on human monitoring" and generated no automated alerts. It did not display the limits that applied to each account; "the person viewing PMON had to know the applicable limits to recognize that a limit had been exceeded." It also slowed down during high-volume events, such as the one in progress. The unwanted shares piled up in an internal account known as the 33 Account, which had a gross position limit of $2 million. That limit was not connected to anything that could stop orders being sent.

## The Fix

Knight had no written procedures for incident response, so the technology team worked on the problem in a live market while SMARS kept trading. At one point, according to the SEC, it uninstalled the new code from the seven servers where it had been deployed correctly. This, the order says, "worsened the problem." Incoming orders on those seven servers now found the repurposed flag and the old Power Peg code, and did what the eighth server had been doing all morning.

The next day, Knight announced that the incident "was related to Knight's installation of trading software" and that "this software has been removed from the company's systems." It put the realised pre-tax loss at approximately $440 million and said its capital base had been "severely impacted". Its shares, according to the Times, had fallen 32 percent on the Wednesday and closed down another 63 percent on the Thursday, at $2.58.

On 6 August a group of six firms, Jefferies, Blackstone, GETCO, Stephens, Stifel and TD Ameritrade, put in $400 million in exchange for preferred stock convertible into about 267 million common shares, at $1.50 a share. That came to about 73 percent of the company. Knight's filing said that without it, a liquidity crisis "would have threatened Knight's ability to continue to operate", and that its audit committee had skipped the usual shareholder vote because the delay "would seriously jeopardize the financial viability of Knight." Chief executive Tom Joyce said the firm's capital had been "restored to a level that more than offsets the loss incurred last week." On 19 December 2012, Knight and GETCO announced a merger that valued Knight at about $1.4 billion and offered its shareholders $3.75 a share. The two firms combined as KCG Holdings on 1 July 2013.

## The Certification

On 16 October 2013 the SEC fined Knight $12 million. It was the agency's first enforcement action under the Market Access Rule, Rule 15c3-5, adopted in 2010 to make brokers control the risks of their own access to the market. Daniel Hawke, chief of the Enforcement Division's Market Abuse Unit, said firms "must look at each component in each of their systems and ask themselves what would happen if the component malfunctions," and that Knight's "failure to ask these questions had catastrophic consequences."

The order also noted an earlier opportunity. In October 2011, after a weekend disaster recovery test, one of Knight's desks carried on quoting off the test data when trading began on Monday, and lost nearly $7.5 million. Knight fixed that system and added an item to a checklist. It did not, the SEC found, broadly consider whether it could stop erroneous orders from any other system.

The rule required Knight's chief executive to certify each year that the firm's controls complied with it. In March 2012, five months before the eighth server, he signed. The certification did not actually say the controls complied. Through a drafting error, which the SEC accepted was unintentional and which the CEO did not notice, it said Knight had "processes" to comply. On that point, at least, the paperwork turned out to be accurate.

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*Filed from public reporting:*

- [U.S. Securities and Exchange Commission — "In the Matter of Knight Capital Americas LLC, Release No. 70694, Order Instituting Administrative and Cease-and-Desist Proceedings (October 16, 2013)"](https://www.sec.gov/litigation/admin/2013/34-70694.pdf)
- [U.S. Securities and Exchange Commission — "SEC Charges Knight Capital With Violations of Market Access Rule"](https://www.sec.gov/news/press-release/2013-222)
- [Knight Capital Group, Form 8-K Exhibit 99.1 — "Knight Capital Group Provides Update Regarding August 1st Disruption to Routing in NYSE-Listed Securities"](https://www.sec.gov/Archives/edgar/data/0001060749/000119312512332176/d391111dex991.htm)
- [Knight Capital Group, Form 8-K Exhibit 99.2 — "Knight Capital Group Notice Regarding Capital Infusion Transaction and Reliance on Exemption to NYSE's Shareholder Approval Policy"](https://www.sec.gov/Archives/edgar/data/0001060749/000119312512338098/d392396dex992.htm)
- [Mondo Visione — "Knight Capital Group Completes $400 Million Equity Financing Agreement"](https://mondovisione.com/media-and-resources/news/knight-capital-group-completes-400-million-equity-financing-agreement-infusio-201286/)
- [The New York Times DealBook — "Knight Capital Says Trading Glitch Cost It $440 Million"](https://dealbook.nytimes.com/2012/08/02/knight-capital-says-trading-mishap-cost-it-440-million/)
- [NBC News — "Knight Capital gets $400 million lifeline"](https://www.nbcnews.com/business/markets/knight-capital-gets-400-million-lifeline-flna926363)
- [Knight Capital Group and GETCO Holding Company, Form 425 — "Knight Capital Group and GETCO Holding Company Agree to Merge"](https://www.sec.gov/Archives/edgar/data/1060749/000119312512508185/d455870d425.htm)