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Knight's bizarre trades rattle markets

August 1, 2012: 12:28 PM ET

Knight Capital Group (KCG) was behind a series of bizarre moves in otherwise thinly traded stocks early Wednesday.

Knight spokesperson Kara Fitzimmons acknowledged that "a technology issue" occurred in its market-making unit that affected how shares for some 150 NYSE-listed stocks were routed. "Knight notified its market-making clients this morning to route listed orders away," she said in a statement, adding that the company continues to investigate.

Knight's shares dropped more than 20% after traders saw extreme volume spikes in a number of stocks, including preferred shares of Wells Fargo (JWF) and semiconductor company Spansion (CODE). Both stocks, which see roughly 100,000 trade per day, had changed hands more than 4 million times by late morning.

Knight's shares ended the trading day down 33%.

The New York Stock Exchange said it is investigating trading activity in 140 stocks, including Alcoa (AA), Bank of America (BAC), Caterpillar (CAT) and Dow Chemical (DOW) between the market's open and 10:15 a.m. ET.

The SEC also said it is "closely monitoring the situation" and is in "continuous contact with the  NYSE and other market participants."

Several traders said it's yet another instance of algorithms gone wild. "August 1st is another day that will live in market structure infamy," said Joe Saluzzi, co-head of trading at Themis Trading.

Investors won't soon forget the infamous 'flash crash' of 2010, when the Dow industrials plunged nearly 1,000 points in a matter of minutes due to faulty trading algorithms.

Knight Capital touts its significance in the world of high-frequency trading. Earlier this year, the firm announced that it had enhanced its "Sumo algorithm" to execute trades even faster.

Related: Harley-Davidson shares slide after earnings miss

By 11 a.m. ET, the NYSE had halted trading in six stocks as so-called circuit breakers were triggered: China Cord Blood (CO), CoreLogic (CLGX), Trinity Industries (TRN), Kronos Worldwide (KNOS), Molycorp (MCP), and Digital Domain Media Group (DDMG). Both China Cord Blood and CoreLogic were halted twice.

By Wednesday afternoon, the NYSE decided to cancel trades in six stocks because they were executed at 30% above or below their opening price. The affected stocks are Wizzard Software (WZE), China Cord Blood, Reaves Utility Income Fund (UTGRT), E-House (China) Holdings (EJ), American Reprographics (ARC), and Quicksilver Resources (KWK).

The NYSE said it is continuing to review Wednesday's trading activity.

Knight Capital, which said it lost around $30 million because of Nasdaq's (NDAQ) trading glitch on Facebook's (FB) opening day, can't point fingers at that exchange this time around, since the halted trades were executed on the NYSE (NYX).

The glitch may cost Knight a pretty penny since "you can't unwind positions like this quickly," said Saluzzi.

-- CNNMoney's Ben Rooney and Hibah Yousuf contributed.

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Maureen Farrell
Maureen Farrell
Staff writer, CNNMoney

Maureen Farrell is a staff writer at CNNMoney and covers Wall Street, banking, mergers and the stock and bond markets. Prior to joining CNNMoney, she covered venture capital and entrepreneurs for Forbes, and mergers and bankruptcy for Mergermarket and Debtwire, both divisions of the Financial Times.

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