> He also makes an interesting point related to what you're saying: the SEC says the risk management controls were inappropriate, but clearly Knight thought the

> He also makes an interesting point related to what you're saying: the SEC says the risk management controls were inappropriate, but clearly Knight thought they were appropriate or they would have fixed it. > This would mean that Knight Capital did have appropriate controls the day before the accident. I think these claims are seriously confused. SEC fines don't require mens rea, so Knight is simply being punished for having inappropriate controls, their view on the matter be damned. Kitchensoap rightly observes that "this event was very harmful" does not imply "this event was caused by extreme negligence". But the SEC filing focuses on alerting and controls; position limits don't prevent a specific misstep, but they limit the maximum size of any error that does occur. (Knight had position limits on accounts, but didn't use them as fundamental boundaries restricting actual trade volume.) The thesis is that Knight should have prepared to mitigate "unknown unknowns", in which case the size of the error is relevant because the size was exactly what should have been controlled for. On appropriate controls, SEC fines are certainly outcome-biased, but the claim is obviously that these controls were always inappropriate, and the disaster simply revealed them. Post-disaster punishment creates an ugly system where people who don't take excess risk can be outcompeted before their competitors crumble, but the rule isn't actually conditional on failures. Kitchensoap asks whether Knight would be judged so harshly if they'd only lost $1,000. Socially, perhaps not, but legally they actually would have! The SEC isn't just punishing Knight for losing money but for disrupting the market with improper trades; it specifically notes that for some "...of those stocks, the price moved by greater than ten percent, and Knight’s executions constituted more than 50 percent of the trading volume. These share price movements affected other market participants...". A smaller loss wouldn't have defended against that charge, while a smaller trade wouldn't have violated SEC rules. I think the author is basically aware of this, since his fundamental point is that the SEC is describing the legal wrongs rather than the technical mistakes. That's a good point and I'm glad you linked this. But I think his focus on the specific deployment error neglects the fact missing position controls were the larger legal and technical failure.