Knight Capital is what's known as a market maker for U.S. stocks in that the firm agrees to buy and sell shares at given market prices on behalf of the actual buyers and sellers.
Their network handles stock trades for many retail brokerage firms and individual clients. On any given day, more than $20 billion worth of shares change hands on Knight's network, the company's website says.
Shortly after the NYSE opened on Wednesday, trading in 148 companies that list on the exchange was unexpectedly volatile and prone to bizarre price swings. Iconic companies such as Berkshire Hathaway, Anheuser Busch, Citigroup, American Airlines, Wells Fargo, Goodyear, Radio Shack and Dole all moved in large, unpredictable movements in the first few minutes of trading.
In some cases, stocks moved by more than 10 per cent.
When Wall Street traders began to question what was going on, Knight issued a statement acknowledging that "a technology issue occurred in the company's market-making unit related to the routing of shares" and urged clients to route their orders on to other networks.
The Securities and Exchange Commission and the stock exchange itself then said they were reviewing transactions in the affected companies, and implemented temporary trading halts on some firms.
Before markets closed, the NYSE announced it would cancel all trades that went through at more than 30 per cent above or below the opening price of the following shares Wednesday: Wizzard Software Corp., American Reprographics Co., China Cord Blood Corp., E-House (China) Holdings Ltd., Quicksilver Resources Inc. and Reaves Utility Income Fund.
At one point, shares in Wizzard (ticker symbol WZE) briefly jumped by more than 400 per cent.
Stock in N.J-based Knight Capital itself was hit hard as a result of the fiasco, off by 23 per cent to trade below $8 a share on the NYSE at midday. That's the shares' lowest level since 2005.
But by midday most of the strange trading appeared to have stopped, as the broad Dow Jones Industrial Average was off just 10 points to 12,998. The S&P 500 index was in similar shape, off three points to 1,375.
Investors may have been able to temporarily shrug off their concerns, but the incident drew parallels to the so-called "flash crash" of May 6, 2010 when the Dow Jones and S&P both lost roughly 10 per cent of their value within 20 minutes because of a mysterious technical trading glitch that has yet to be fully explained.
The incident overshadowed what was supposed to be the major financial news story for investors Wednesday, the Federal Reserve's latest rate decision. Chair Ben Bernanke offered no new hints of stimulus to come, nor did he extend the Fed's pledge to keep rates at their current record lows.
"We have a couple of positives," said Zahid Siddique, portfolio manager at Gamco in Rye, N.Y., "offset by a couple of negatives."