The trading firm Knight Capital recently rushed to develop a computer program so it could take advantage of a new Wall Street venue for trading stocks.
But the firm ran up against its deadline and failed to fully work out the kinks in its system, according to people briefed on the matter. In its debut Wednesday, the software went awry, swamping the stock market with errant trades and putting Knight’s future in jeopardy.
The fiasco, the third stock trading debacle in the last five months, revived calls for bolder changes to a computer-driven market that has been hobbled by its own complexity and speed. Among the proposals that gained momentum were stringent testing of computer trading programs and a transaction tax that could reduce trading.
In the industry, there was a widespread recognition that the markets had become more dangerous that even specialists realized.
“What is starting to become clear is that the costs in terms of these random shocks to the system are occurring in ways that people never anticipated,” said Henry Hu, a former official at the Securities and Exchange Commission and a professor at the University of Texas, Austin.
Knight, founded in 1995, is a leading matchmaker for buyers and sellers of stocks, handling 11 percent of all trading in the first half of this year, according to the data firm Tabb Group. Knight lost three-quarters of its market value in the last two days, in addition to losing $440 million from the errant trades, and was scrambling to find financing or a new owner.
While the turbulence Wednesday hit scores of individual stocks, the broader market took the spasm in stride, closing down less than 1 percent Wednesday and Thursday. The SEC, which has opened an investigation into potential legal violations at Knight, said it was “considering what, if any, additional steps may be necessary.”
Some SEC officials are pushing new measures that would force firms to fully test coding changes before their public debut, according to a government official who spoke on the condition of anonymity. While the idea has long been discussed at the agency, it gained traction after the Knight debacle.
The SEC applied limited safeguards on trading after the “flash crash” of 2010 sent the broader market plummeting in a matter of minutes. But big investors like T. Rowe Price, members of Congress and former regulators said Thursday that the SEC and the industry have been too complacent and need to do more to understand and control the supercharged market.
“Things are happening far too regularly,” said Ed Ditmire, an analyst at Macquarie Securities who focuses on stock exchanges. “It’s not nearly as solid a market as it should be, so there’s plenty of room for improvement.”
Arthur Levitt Jr., a former chairman of the SEC, said that recent events “have scared the hell out of investors” and called for the agency to hold hearings.
“I believe this latest event was handled better than the flash crash, but the larger question is whether our markets are adequate to deal with the technology that is out there,” Levitt said. “I don’t think they are.”
Regulators have made changes to the markets over the last two decades that have taken it out of the hands of a few New York institutions and allowed dozens of high-frequency trading firms and new trading venues to dominate the stock market.
The high-speed firms like Knight, which connect directly to the servers of the exchanges and are capable of executing thousands of trades a second, are responsible for more than half of all activity in American markets. Companies that have benefited from the computerization of the markets have largely managed to fend off tighter controls by pointing to the steady decline in the cost of trading stocks.
Some large, institutional investors have said that the increased volume of trading has made it easier to get in and out of stocks, lowering the ultimate costs for individuals who invest in popular vehicles like mutual funds.
But even people who had previously defended the advances in trading technology said Thursday that too many problems have been overlooked.