Opinion

A very dark Knight

His bosses screwed up — and so did the regulators: A Knight Capital employee works during last week’s mess. (AP)

The disaster at Knight Capital Group is about a lot more than a computerized-trading program gone wrong — it also exposed massive incompetence among the folks who are supposed to be watching the markets.

The hapless Knight lost more than $400 million in far less than a trading day thanks to the bum program, and nearly went out of business.

CEO Tom Joyce, a former long-time executive at Merrill Lynch and one of stock market’s go-to-guys, is earning kudos for scrambling last weekend to save the company and 1,500-plus jobs, many of them in the New York area. And it is good that Knight employees from traders to secretaries are still getting paychecks — but don’t go anointing Joyce as Wall Street’s Most Valuable Player for his last-minute heroics.

People like Joyce are supposed to know what they’re doing and understand the consequences of their actions. In this case, neither seems to hold.

Knight’s trouble began with a computerized trading program that began selling $5 billion worth of stock last Wednesday in a trade that was never supposed to happen. People with direct knowledge of the matter say there was almost no human supervision of the program as it began implementing a complex algorithm, relying on computerized orders to buy and sell stocks.

Thing is, you need humans in the loop to keep tabs on these things — and Knight apparently didn’t have ’em.

The result: A massive trading loss and a nearly bankrupt firm. To stay alive, Joyce had to cut a deal with a group of new investors, heavily diluting existing shareholders to the point that shares have lost about 70 percent of their value.

He also lost out on a deal to sell his firm to private-equity outfit Blackstone for around $1.2 billion, which was close to a purchase before things went south.

Yet Joyce survives, winning cheers on Wall Street.

Another survivor appears to be the regulator who was supposed to be making sure this stuff doesn’t happen and that the markets are safe: Mary Schapiro, the chairwoman of the Securities and Exchange Commission.

Like Joyce, Schapiro is widely regarded as affable and smart — yet her inattention to the hemorrhaging of the US stock market should be enough reason for her to be replaced as well.

For the past three-plus years, both Obama appointee Schapiro’s SEC and the Obama Justice Department have been telling investors that they’re doing all they can to protect small investors. That’s why, they say, they spend so much time cracking down on insider trading.

But insider trading is largely a victimless crime. Yes, someone with a confidential tip might have an unfair advantage on a trade, but the person on the other end was going to buy or sell the stock anyway.

Meanwhile, regulators seem blind to the ongoing dangers of badly-overseen computerized trading and its impact on the markets. More than two years ago, the so-called “flash crash” saw the Dow Jones Industrial Average fall about 1,000 points in a matter of minutes. Just this May, faulty technology on the Nasdaq gave us the botched Facebook IPO, which left many small investors holding over-valued shares — with lots of them not knowing for days if they actually held any Facebook stock.

Last week’s Knight debacle only underscored for average investors how dysfunctional the US stock markets have become — and how deeply our market leaders are asleep at the switch.

For all the insider-trading busts and headline-grabbing regulatory actions, investors feel less and less safe putting money into the market. Money is flowing out of stock mutual funds.

Fine, Schapiro rightly condemns what happened at Knight as unacceptable. But it’s equally unacceptable to allow the same conditions that caused these screwups — the flash crash, the Facebook mess, the Knight debacle — to persist, as she has.

Our market pundits should keep all of that in mind when they question why average investors keep yanking money out of stocks for the safety of their mattress. Why would they want to roll the dice in a market that can lose 1,000 points in a minute, or where a firm can lose $400-plus million in a matter of minutes and where no one is paying attention?

Charles Gasparino is a Fox Business Network senior correspondent.