“It seems Knight Capital Groups’ market making algorithm went haywire and started selling at the bid and buying at the ask, just the opposite of what it should do. This turned their algorithm into a money burning mechanism. Since these algorithms are now very fast, KCG lost the bid/ask spread about 24 times per second across many stocks, which means it was very efficient at burning money. It looks like KCG lost $440 million in a few hours yesterday (8/1/2012) morning. For a detailed, and up-to-date, summary of KCG’s calamitous morning I recommend the analysis on Nanex.”
Knight Capital Group, A Perfect Example of Firm Specific Risk