[ by Howard Haykin ] Knight Capital Source of Error. Dozens of NYSE stocks experienced unusually high volume in early morning trading, due to a technology error at market maker Knight Capital - the latest in a series of high-profile mishaps that have damaged investor confidence in financial markets. According to a Knight employee who asked to remain anonymous, the errors were caused by a malfunction in a so-called trading algorithm.   This led the NYSE to cancel transactions in 6 securities that occurred during a period of heightened volatility after the open.  All told, the NYSE reviewed trades in 140 different issues.

Trades were cancelled in these issues: (i) Wizzard (WZE,A), (ii) China Cord Blood Corp (CO.N), (iii) E-House Holdings (EJ.N), (iv) American Reprographics (ARC.N); (v) Quicksilver Resources (KWK.N), and one other.  Trades executed at 30% higher or lower than the opening price will be canceled, the NYSE said

Knight Capital, whose shares were unmercifully punished ... by investors - falling 33% to $6.94 - issued this statement:  "This morning, a technology issue occurred in Knight's market-making unit related to the routing of shares of approximately 150 stocks to the NYSE." Knight also said the problem prompted it to tell clients to send orders to other firms - that directive probably was most responsible for the plunge in the price of KCG shares. A surge of orders were executed at the start of trading on Wednesday, disrupting normal trading activity.  Several market participants said it's probable these orders had been intended to be filled throughout the day - but instead were executed in the opening minutes of trading. The broader market was little changed, with the Standard & Poor's 500 index .SPX .INX down 0.18 percent in afternoon trading after the Federal Reserve issued its policy statement at the close of a two-day meeting.  "It appears to be dozens if not hundreds of stocks that have (seen) extremely high volume and extremely rapid movement," said Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, NJ.  The impact of the trading glitch, however, was the focus for traders. The volatility caused pauses in trading in five stocks: Corelogic Inc (CLGX.N), China Cord Blood Corp, Kronos Worldwide (KRO.N), Trinity Industries (TRN.N) and Molycorp. "All the brokers were on it within seconds, recognizing this was not normal behavior in most of these stocks," said Doreen Mogavero, chief executive at Mogavero, Lee & Co, who trades on the floor of the NYSE. Unusual volume was seen in a disparate group of stocks, including Lithia Motors (LAD.N), which already had seen trading volume of 4.3 million shares. The stock usually trades about 95,000 shares daily. Among other stocks, Protective Life (PL.N) had already traded more than 10 times its usual volume, and Juniper Networks (JNPR.N) has already seen 6 ix times its usual daily volume. For further details, go to:  [Reuters, 8/1/12]   and    [CNBC, 8/1/12].