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Risk Management Failure May Have Contributed to Losses at Knight

Federal regulators are investigating the risk management practices

Regulators involved in an ongoing investigation into multimillion-dollar losses at Knight Capital Group are turning their attention to the risk management controls that were - or were not - in place at the firm before the trading losses occurred.

The joint team from the U.S. Securities and Exchange Commission and the Office of Compliance Inspections and Examinations are looking into a breakdown of control at the company, according to Reuters. The federal regulators have found that there was no single person in charge of risk management at the firm, which may have exacerbated the August 1 losses.

According to the source, outdated computer software was accidentally activated at the firm, which led to a string of unauthorized stock trades. Over the course of about 45 minutes, the trades continued unabated, eventually reaching roughly $7 billion in value. Once the problem had been addressed, Knight was forced to unload most of the stocks, resulting in a net loss of about $440 million.

The debacle has helped push confidence in the stock market to near record lows. A recent survey of brokers and dealers with financial jobs on Wall Street revealed 26 percent have a "very weak" confidence in the market, The Wall Street Journal reported.

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