Edgar Perez’s Knightmare on Wall Street

The $3.8 billion of erroneous purchase orders that flew into Chinese equity markets on August 16, 2013, and later trades to try to offset the error, led to Everbright Securities, the country’s seventh-largest brokerage by market value, being barred from most proprietary trading, lifetime professional bans for four senior managers and the resignation of the president. The China Securities Regulatory Commission also imposed $85 million in fines and confiscation of any illegal gains.

Strict enforcement should be the norm of the nation’s capital market and the penalties on Everbright have set the benchmark, China Securities Journal said in an editorial. Meanwhile, Knight Capital’s own $7 billion erroneous position accumulated in the first 28 minutes of trading of August 1, 2013, still goes unpunished by the SEC.

Referring to CEO Thomas Joyce, Edgar Perez writes in Knightmare on Wall Street: “He will be forever remembered by the trading error that his strategic timing and management style allowed to happen.”  A follow-up to The Speed Traders, in which Perez examined high-frequency trading and interviewed a handful of practitioners, Knightmare on Wall Street addresses the story of Knight Capital, the firm that lost $461 million and shook U.S. equity markets in the summer of 2012, about a year before Everbright’s trading error.

Perez’s chapters about the incident and the events in the days after are written as a chronological-cum-investigative-report, with Perez starting off on August 1 at 9:30AM, reviewing the dramatic efforts to save the firm and then finishing on August 6 when the firm announced the consortium that rescued it.

Having risen to prominence as a globetrotting proponent of the regulated deployment of technology in trading, Perez finds plenty of targets for Knightmare on Wall Street, his review of Knight’s history, starting with Joyce, who was absent the morning of the incident. “On July 31, 2013, one of many quiet summer days in Wall Street, Joyce underwent knee surgery; he was getting ready to spend the days after resting at home. What could go wrong with deploying a piece of software to participate in NYSE‘s RLP? An event like that was not even in his radar, as it was business as usual.” RLP was the Retail Liquidity Program started by the New York Stock Exchange.

His narrative is at times caustically outrageous. “Why Knight took 28 minutes to stop the order flow was not clear until much later. Knight could have shut down its market flow to the exchange entirely but that could have jeopardized other orders, opening Knight up to additional liability. Neither Sadoff nor Sohos wanted to take that responsibility.” Steven Sadoff and George Sohos were two of the top executives who struggled to respond to the emergency. Couldn’t have they just unplugged the systems?

Perez shows in Knightmare on Wall Street a talent for distilling multiple threads of events and stitching them together into a seemingly singular narrative. From the internal discussions on how to stop the bleeding to the chaos on the New York Stock Exchange’s trading floor to the on-air reactions of CNBC’s anchors, Perez presents the story from different angles and captures the reader’s attention despite using one or two financial terms hard to be immediately understood by the layperson.

In the final chapter of Knightmare on Wall Street, Perez reviews the immediate consequences of Knight’s acquisition by GETCO, a fierce competitor that participated in its rescue. There is no place for two CEOs, so Joyce leaves, not without pocketing a $7.5 million payout. How could he take that much money when his shareholders lost almost half a billion dollars? There must be something American regulators need to learn from China; drastic and expeditious action is one of them. It is a disturbing end to a thought-provoking and action-filled read.