Tom Joyce knows his company made a mistake. When Knight Capital software began a string of erroneous trades that disrupted the price of 148 companies at the New York Stock Exchange in early August, Joyce was quick to act. And he was quick to take the blame, an act that seems increasingly rare in an age when image often takes precedence over substance.
Not only was Joyce quick to act, but so was the market. Within days, his company managed to raise $400 million from investors to stay afloat, after taking a total loss of $440 million after the trading debacle.
Duncan Niederauer, CEO of NYSE Euronext, has known Joyce for 15 years and told The Times that while many people thought this incident could cripple the market and Knight itself, Joyce’s swift response enabled the company to stay afloat.
“I thought TJ handled the adversity the way a leader should,” Niederauer said. “He took accountability and made himself accessible to answer questions. He was forthright and transparent… As a result, I think most people were rooting for him and trying to find ways to help him and Knight get through this.”
Many on Wall Street agreed. John Taft, CEO of RBC Wealth Management, served on the Board of the Securities Industry and Financial Markets Association for several years with Joyce.
“…I can tell you that he is a stand up guy who is admired, respected and trusted by his peers,” Taft stated in a Forbes article.
Joyce told CNBC in August that his company “made an error and we paid the price.” But help came fast. Roy Smith, a finance professor at NYU, told Forbes magazine that “This is the way the way things should work in this kind of situation. It was a free market solution to a free market problem.”
No taxpayer dollars went to the company, nor did other companies let Knight fall into the abyss shared by the likes of Bear Stearns and Lehman Brothers. The companies that came to Knight’s aid include the Jefferies Group, which conceived and structured the investment, Blackstone, GETCO, Stephens, Stifel Financial and TD Ameritrade Holding Corporation.
“I was impressed with [Joyce’s] ability to leverage his industry relationships to quickly arrange temporary and permanent financing for his wounded firm and the decisiveness he showed in choosing dilutive terms for the sake of survival,” Taft said.
Twenty-six year Darien resident Joyce, who has been CEO at Knight since 2002, told The Times that he has always tried to do the right thing, both professionally and personally. “I think we’ve also established a reputation as tough competitors, but competitors who compete honorably,” Joyce said. “We’re going to put as much effort and ambition and focus into it as anybody else, but do it in a fashion that people respect. After a long time behaving in that fashion, reputations develop.”
Niederauer agreed. “TJ has always been an open, honest, straightforward relationship builder, with customers, competitors and the media alike,” he said.
While the debacle sent Knight stock tumbling by 70%, no clients were affected, Joyce said. The problem happened because new software was not installed on one of eight servers, which triggered the erroneous trading. Joyce initially tried to get the Securities & Exchange Commission to void the transactions, according to reports, but the SEC established rules after the May 2010 “flash crash” that made it harder for companies to claim trades were made inadvertently. Nearly $1 trillion in market value was lost that day, which caused the Dow Jones Industrial Average to drop by almost 1,000 points, although it recovered slightly by the end of the day.
Joyce said he hopes the regulators and exchanges will develop “kill switches” to enable stakeholders to automatically shut down trading activity if trades surpass a certain dollar amount or volume.
Mary Schapiro, SEC chairman, said in a statement that the SEC was looking into what changes could happen, if any, to prevent future breakdowns.
“I have asked the staff to accelerate ongoing efforts to propose a rule to require exchanges and other market centers to have specific programs in place to ensure the capacity and integrity of their systems,” Schapiro said. “And I have directed the staff to convene a roundtable in the coming weeks to discuss further steps that can be taken to address these critical issues.”
That roundtable happened Tuesday. While Schapiro argued that recent rules helped reduce damage to the market during the Knight crisis, some have argued otherwise. MarketWatch.com reported that Schapiro, citing the SEC flash crash rules, shot down Joyce’s request to cancel the bad trades.
At a Barclays conference in September, Joyce addressed the SEC rules on erroneous orders.
“Make no mistake this is an error and when we went to break the errors, the New York Stock Exchange, I believe, was willing to work with us. But they were hamstrung by a bigger ruleset that came out of the SEC,” Joyce said. “[T]he SEC — I sure wish they hadn’t made this decision — but I can’t fault them from making it because they abided by the rules they had. [The SEC] said, ‘No you can’t do anything… unless it falls within the clearly erroneous rule set.’
“So, I think we have proven that that’s a bad rule,” Joyce added.
However, the new rules enabled the NYSE to cancel trading in at least six stocks because the trading price exceeded 30% of its reference price, which is the price before the disruption, and more than 20 stocks were involved, which is the minimum number allowable for the erroneous trade rules to apply.
Criticism has come from some who said this incident is indicative of the increasing reliance on technology, which has hurt the trading profession.
“The reality is that electronic trading has turned out to be simply another bill of goods sold by Wall Street to investors,” writes MarketWatch columnist David Weidner. “It’s not dependable. It’s not trustworthy. It’s easily manipulated. It hasn’t delivered what the industry and the Securities and Exchange Commission assured us it would.”
Dan Seiver, a finance professor at San Diego State University, provided Forbes with a similar assessment.
“The big take away for investors is that a computerized trading program was at the center of a glitch so big that Knight didn’t have enough capital to take the losses it created,” Seiver told Forbes. “Look how easily the system can blow up without human intervention. That’s scary.”
Joyce, however, said the Knight situation was caused by human error and was not a result of technophilia run wild.
“I think certainly the checks and balances that we may have, that were perhaps missing on that day, would have to be firmly established,” Joyce told The Times. “We need to make sure we establish much more clearly delineated responsibilities [for software developers, installers and testers] that are separate and distinct.”
IBM is conducting a review of the company’s software and hardware infrastructure and Joyce said this review will be complete sometime around Halloween. Knight also appointed three new board members and has restructured its management team to ensure a stronger system of accountability.
Joyce added that the SEC was “very helpful” during the ordeal.
“They can only do so much,” Joyce said. “I was in constant dialogue with them. Ultimately it was our responsibility to turn our system off.”
Just two months after the incident, Joyce said about 90% of Knight’s clients have returned to do business with the company.
“It’s very gratifying,” he said.
Joyce has over 30 years of experience in the securities industry. Before joining Knight, he was the global head of trading at Sanford C. Bernstein, and he also spent 15 years at Merrill Lynch.
He also finds time to give back. He currently serves on the board of directors of Special Olympics of Connecticut and at the Alfred E. Smith Memorial Foundation. He also joined the Ronald McDonald House New York board of directors in October 2010.
When asked what kind of advice he would give to up-and-coming finance professionals, he emphasized the importance of building relationships.
“The greatest currency we have is our relationships,” Joyce told The Times. “Make sure your focus is on your clients and your relationships with them, and that will serve you well over time.”