Is This Strike Two for Knight Capital?

The Flash Crash breeds uncertainty.Knight Capital (NYSE:KCG) has not had a lot of good luck recently. The company, headquartered in Jersey City, New Jersey, lost power during hurricane Sandy and was forced to do business running on generators. On Wednesday, those generators failed.

According to Bloomberg, a memo from the company read: “Due to a building emergency (power issues), Knight Capital Americas is asking you to seek an alternate destination for the order handing and execution of your OTC, Options and Listed order until further notice. All computer interfaces with Knight will be shut down with no new orders, both by phone or electronic, being accepted at this time.”

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The stock opened at $2.60 and trekked about 4 cents lower before the power went out. As the news hit, the stock hit a low of $2.44 before rebounding to about $2.51 in early afternoon trading.

Knight Capital lost about $461 million due to a technical error on August 1 that almost bankrupt the company. It was saved by a consortium of investors led by Jefferies Group (NYSE:JEF) and Blackstone Group (NYSE:BX). The company reported a third-quarter loss of $6.30 per share.

StocksThe trading glitch raised a number of concerns among both regulators and market participants. Knight Capital’s power outage comes as exchanges are testing all-electric trading systems designed to prevent the full closure of markets if another storm like Sandy threatens to shut down the East Coast again. Firms like Knight capital are likely to implement their own measures to ensure that Mother Nature doesn’t get in the way of business. The evidence is mounting that electronic, high-frequency trading is vulnerable to a number of problems.

Problems associated with electronic trading were blamed for an incident in May 2010, when the Dow lost nearly 1,000 points in 20 minutes. Critics have blamed the Securities and Exchange Commission for not acting fast enough to investigate how regulation could help make the practice safer. One popular piece of legislation up for discussion is a mandatory “kill switch” that would allow firms and exchanges to quickly deactivate a rogue program.

With or without a kill switch, both customers and investors have been keeping a careful eye on Knight Capital after the August 1 fiasco. The company can hardly be blamed for Wednesday’s outage — backup generators for the backup generators? — but the event certainly doesn’t help investor confidence. Shares are still down about 3.6 percent in the early afternoon.

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