Make Volatility Your Friend

NEW YORK (TheStreet) --The investing public isn't feeling so great these days about the stock market or the financial industry in general, and last week's trading snafu by Knight Capital Group(KCG) was the latest log to fall on the bonfire of mistrust that is engulfing Wall Street.

The blaze is also being stoked by all the usual vanities, to borrow a phrase from the great Tom Wolfe.

"We need new regulations!" say the politicians. "The game is rigged!" cry the pundits. "Will Knight survive this fiasco?" wonder the speculators.

I think everyone needs to take a deep breath. Let's review what happened here.

Knight is a market-making, electronic execution, and institutional sales and trading firm that used to be the largest trader of U.S. stocks on Wall Street with a market share over 17% on the New York Stock Exchange.

Last Wednesday, a technical glitch in its proprietary trading algorithms caused sharp swings in a handful of stocks, which ultimately cost the firm $440 million... oh, and its reputation.

The episode was a mini-reprise of the so-called "Flash Crash" that rocked the markets back in 2010 when the Dow Jones Industrial Average suddenly dropped by more than 1,000 points for no apparent reason, only to recover within minutes. That episode brought the rise of high-frequency, computerized trading to the public consciousness, and it too set off a temporary bonfire of the vanities that ultimately resulted in... well... nothing really.

Last week's debacle also reopened fresh wounds from Facebook's(FB) disastrous initial public offering, when some investors experienced trading glitches on the Nasdaq, but what do we really expect here? Do we think that in this age of digitization, computing power will not transform the way our financial markets function?

Assuming the answer is no, then do we actually think there won't be glitches and mistakes resulting from this? In this case, Knight paid a dear price for its transgressions: The value of the company plummeted, it lost huge amounts of business and it suffered damage to its reputation damage that may be irreparable.

"We screwed up," Knight's CEO Thomas Joyce said on CNBC early this week. "We paid the price."