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MISSION:INTANGIBLE, the blog of the Intangible Asset Finance Society, offers critical comments on intangible asset, corporate reputation, and finance; supplemented by quantitative reputation metrics. Intangible assets include business processes, patents, trademarks; reputations for ethics and integrity; quality, safety, sustainability, security, and resilience; and comprise 70% of the average company's value. MISSION:INTANGIBLE is a registered trademark of the Intangible Asset Finance Society.

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Knight Capital: Good grief

C. HUYGENS - Saturday, August 04, 2012
This past week, Knight Capital Group (NYSE:KCG), a major market maker in global equities, watched briefly as its electronic systems began trading for themselves. Knight Capital picked up the tab for the bad trades: $440 million. Knight's safety system, like BP's blowout protector on the Deepwater Horizon, failed, but unlike BP, the company is not too big to fail. Knight’s reputation as a safe platform for US equity trades is in tatters. It's future is bleak.

Meanwhile, as with most reputational disasters, the regulators – soon to be followed by the litigators – are joining the mommy bloggers in outrage. "Existing rules make it clear that when broker-dealers with access to our markets use computers to trade, trade fast, or trade frequently, they must check those systems to ensure they are operating properly," SEC Chairman Mary Schapiro said Friday. "And, naturally, we will consider whether such compliance measures were followed in this case."

Ironically, Knight Capital Group’s reputational metrics were signaling danger. According to Steel City Re's data, starting 19 July, and then again 26 July, there were two great drops in the company’s reputation ranking and a surge in reputational value volatility from the 52nd to the 92nd percentile. Also, both forward looking trend indicators predicted a further deterioration in the company's reputation standing. The weekly data calculated Thursday night 28 hours into the crisis show a bleak reputational picture. The vital signs signal terminal. Ranking near zero, volatility near 100%. Trends strongly negative. In short, stakeholders, knowing that technology companies rarely recover from bad core events, and knowing that regulators are not being kind to the sector, are already mourning the firm’s passing.

A lesson to be remembered is that reputation is a consequence of corporate behavior that motivates stakeholders to behave in ways that either reward or punish the corporation. A safety failure of a mission-critical aspect of a company's core business motivates adverse behaviors in most stakeholders: customers, employees, vendors, regulators, creditors, and of course, investors.

In contrast to the more commonly understood surveys of reputation comprising stakeholder opinions that are ephemeral, stakeholder behaviors leave artifacts such as pricing power, sales volume, labor costs, credit costs, vendor terms, regulator burden, and equity prices. These quantitative artifacts can be captured and reported back to boards on an accelerated, algorithmic, and cost-effective basis. Call them Reputation Metrics. Reputation metrics that capture in near real time the "wisdom of crowds" -- such as those from Steel City Re -- can give management and boards operational situational awareness from a perspective not typically available through traditional corporate operational controls.

In businesses where reputation affects either capital liquidity or regulatory admonishment, factoring reputational metrics into both strategic decision making and active crisis management can be valuable. As Alan Greenspan noted four years ago in a speech at Georgetown University, “In a market system based on trust, reputation has a significant economic value.”

Knight Capital: Bad News Squared

C. HUYGENS - Thursday, August 02, 2012
It is never a good idea to have a core business service breakdown in a bad financial market. Investors, already in a bad mood, give no pause for thought. Or reputation.

Heartland Payment Systems suffered a near death experience when, in a bad market, they suffered the greatest data breach in history. Over time, they were able to restore trust, and repair much of the damage to their reputation. But the short-term liquidity gap was perilous.

This week, the unlucky firm is Knight Capital. According to Dealbook, technical problems yesterday "led the firm’s computers to rapidly buy and sell millions of shares in over a hundred stocks for about 45 minutes after the markets opened. Those trades pushed the value of many stocks up, and the company’s losses appear to have occurred when it had to sell the overvalued shares back into the market at a lower price." Its own share price has dropped from $10.30 at Tuesday's close to $3.54 as this note is being posted.

Once again, a fine company with a small prominent technology problem, fixed, and  a large reputational crisis looming. In the spirit of mortui vivos docent, there could not be a better example of the business case for quantitative reputation management and  Reputation Value Insurance.

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