What We Can Learn from the Knight Capital Implosion

Brokerage firm Knight Capital Group said Thursday it will suffer approximately $440 million in losses after a computer glitch sparked volatile trading in 140 individual stocks at Wednesday’s open.

Jim Cramer
Jim Cramer

In a press release, Knight Capital said the issue was related to its installation of trading software, which sent numerous erroneous orders of New York Stock Exchange-listed securities into the market. Clients were not negatively affected by the erroneous orders, however, the firm said.

To “Mad Money” host Jim Cramer, though, the Knight Capital catastrophe was “jarring to investor confidence.” The errors threatened to wipe out the business overnight, he said. He added that the news has sent the stock sharply lower and could even spark a fire sale, if not “obliterate the entire company.”


“If Knight represents a company that could conceivable be destroyed overnight by a software glitch, we clearly want the opposite,” Cramer said. “We want to own companies that don’t have anything like that level of vulnerability.”

In Cramer’s opinion, investors should look for defensive stocks, such as Clorox.

Cramer likes Clorox because it makes everything from cleaning products, such as Pine-Sol to cat litter under the Fresh Step brand, as well as Hidden Valley Ranch salad dressing and Kingsford’s charcoal, among many other products. People don't stop buying these items because of the economic slowdown, Cramer said.

The company does have to deal with rising commodity costs and it's also facing competition from generic brands, but he thinks these issues are already baked into the stock. Plus, Clorox has dominant market share in most every category, he added.

Clorox currently pays a dividend yield of around 3.5 percent, too.

The stock market is risky as it is, Cramer said, adding investors should not have to worry about software glitches, as well. To avoid such worries, then, he suggests sticking with dividend-paying stocks with solid businesses, such as Clorox.

—CNBC.com contributed to this report

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