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Knight Capital Debacle: The Latest High-Frequency Nightmare -- Regulators, You Paying Attention Yet?

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Maybe this is the fastest way to get high-frequency trading robots to stop ruining our stock market: Have them destroy each and every trading company that operates them.

It might take that sort of carnage to get the attention of market regulators, who have done little to stop the freakish market meltdowns, from the Flash Crash to the Facebook IPO, that have made investors hate the stock market forever.

And now there's the latest train wreck, which the Wall Street Journal has dubbed, for the win, The Knightmare On Wall Street.

That's Knightmare, as in Knight Capital, the New Jersey trading firm whose trading algorithms went haywire on Wednesday, causing crazy trades in about 150 different stocks and costing the firm $440 million.

Just like that, the company is teetering on the edge of destruction, saying it is "actively pursuing its strategic and financing alternatives," which is PR-speak for "Holy crap, we need money fast."

The company's stock price has plunged to $3.40, down 67 percent from Tuesday's close. Analysts are talking bankruptcy.

How does a company get itself into so much trouble so quickly? Easy. Turn on the robots and watch them go.

CNBC stock-market reporter Bob Pisani writes that volume on the New York Stock Exchange on Wednesday morning was up to 300 million shares after the first half-hour of trading, twice its normal volume. A lot of that volume was apparently driven by Knight algorithms making stupid trades in lots of different stocks.

And those stupid trades went on for a long, long time -- long enough for other firms to catch on and start trading against Knight, lucking into a small killing. Firms like Bright Trading of Detroit, whose trader Dennis Dick told the Wall Street Journal:

"The algorithm just kept trading," Mr. Dick said. "There are algorithmic errors everyday but they're caught immediately--this went on for nearly half an hour." He said a number of Bright's traders made 'thousands of dollars' Wednesday by trading during the disruption.

Supporters of high-frequency trading say it helps make the market more "liquid." Which is great when you are the one receiving the precious liquid, as Bright Trading was yesterday. It is arguably less great when you are the one being liquidated, as Knight Capital was.

It is a particularly juicy irony that this is happening to Knight Capital. Its CEO, Thomas Joyce, has been at the front of the pitchfork-wielding mob going after Nasdaq for the technical glitches that marred the Facebook IPO, another debacle that cost Knight and other market-makers hundreds of millions of dollars.

The lesson of Knight Capital is that this sort of thing can happen to any stock, to any trading firm, on any exchange, at any time. It is why investors are fleeing from the stock market in droves. The Investment Company Institute said investors pulled another $3 billion out of stock mutual funds just last week, and have been pulling money consistently out of stock funds for five years running.

As one investor, college professor Perry Glasser, told WSJ columnist Jason Zweig:

With events like the flash crash and this week's stumble, ... "you could buy and hold a company for 15 years and then have everything you've built up disappear in five minutes. No one can take that kind of risk anymore. There's no such thing as a widows-and-orphans stock anymore."

In an interview with Bloomberg TV, Knight Capital's Joyce said he was happy that "nobody else except for us was wounded by this activity." Except that's not really true. Investor confidence has taken another giant kick in the gut. That indirectly hurts the economy by making people more wary about investing.

Market regulators seem vaguely aware of this problem, but they aren't moving very quickly to do anything about it. They currently don't even have the technology or the funds to keep up with most of the trading going on in the market.

The exchanges, meanwhile, need the high-speed traders for the precious revenue they bring in. That's why high-speed trading has spread from stocks to corn futures and more.

So brace yourself for more Knightmares.