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Algorithmic Trading Glitch Costs Firm $440 Million 377

Posted by Unknown Lamer
from the someone-got-fired dept.
alstor writes "Yesterday an update to Knight Capital Group's algorithmic trading software caused massive volume buys and sells, resulting in large price swings on the New York Stock Exchange. As a result, the NYSE canceled some of the trades, but today the loss to Knight has been calculated at $440 million. Ignoring adjustments for inflation, this makes the cost of this glitch almost as much as the $475 million charge Intel took for the Pentium FDIV Bug, which might warrant adding this bug to the list of worst bugs. In light of this loss and the May 6, 2010 Flash Crash, perhaps investors will demand changes from firms using algorithmic trading, since the SEC is apparently too antiquated to do anything about it (PDF)."
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Algorithmic Trading Glitch Costs Firm $440 Million

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    • by Anonymous Coward on Thursday August 02, 2012 @12:58PM (#40857743)

      Thats unfortunate, but what is more undortunate are the cancelled trades. Without the full downside risk high frequency trading takea on an appearance of a club where the superrich bilk regular imvestors and tilt the playing field in theor own favor.

    • by Lennie (16154)

      If I remember correctly, some say the financial crisis was also initiated by a similair algorithmic trading mortgages.

      • Re: (Score:2, Informative)

        by Anonymous Coward

        This is wrong. Mortgage securities are not traded on open exchanges. You can't trade them algorithmically. You have to call your old fraternity buddy on the mortgage desk.

      • by alexander_686 (957440) on Thursday August 02, 2012 @02:18PM (#40858965)

        It did not. You could be thinking of 2 different things.

        You might be thinking of the Collateralized Debt Obligations (CDO) Market. Here we have swaps that are built on slices of bonds which are built on mortgages. Or, better yet, synthetic CDOs, where are swaps built upon other CDOs. Instead of doing the hard work of evaluating the thousands of underlying pieces people used algorithms to determine the prices – and then the banks used the CDOs as collateral to borrow money to buy more CDOs. The algorithms made bad assumptions about the statistical on defaults. This is a completely different beast – it moves very slow.

        Or, during the same time, a lot of firms that used statistical algorithmic trades (which Knight is) where losing money. They were using computers to shave pennies of trades – basically eating the lunch of the old line market makes. For years they were quietly chugging away making a constant steam of money and all of a sudden they were losing money. The computers worked fine. The markets were in a state of chaos, the underlying assumptions were no longer valid. A lot of them just turned off their computers for 6 months until the market sorted itself out again.

  • TFA (Score:5, Informative)

    by Anonymous Coward on Thursday August 02, 2012 @12:53PM (#40857687)

    For those not interested in going through all of the links just to find the one that links to the relevant article:

    http://www.forbes.com/sites/steveschaefer/2012/08/02/knight-capital-trading-disaster-carries-440-million-price-tag/ [forbes.com]

  • by Kelbear (870538) on Thursday August 02, 2012 @12:54PM (#40857695)

    A common defense of flash-trading is that it provides market liquidity in that it provides counterparties to the desired transactions of the rest of the market.

    But I've yet to see someone discuss how the added-value of millisecond liquidity is substantially superior to having exchanges post transactions in 1-sec. intervals to discourage millisecond arbitrage during which no new events have occured and no new market analysis has taken place, only speculation and playing the system against proper investors? Can someone illuminate me on this point?

    • by turkeyfeathers (843622) on Thursday August 02, 2012 @12:58PM (#40857745)
      Millisecond liquidity is substantially superior to having exchanges post transactions in 1-sec intervals because it allows Goldman Sachs to make more money... duh.
    • by Genda (560240) <mariet@@@got...net> on Thursday August 02, 2012 @12:59PM (#40857759) Journal

      What part of wealthy, powerful people with vast computing power screwing the general public do you not understand?

    • Can someone illuminate me on this point?

      No, but I'm sure we can find plenty of "experts" on Wall Street willing to call you ignorant and ill-informed while suggesting that we should dismiss silly questions like yours. That they're experts from the financial industry seems to have the unfortunate effect of lending them credibility in the eyes of most decision-makers.

      • by hairyfeet (841228) <bassbeast1968@@@gmail...com> on Thursday August 02, 2012 @02:36PM (#40859191) Journal

        That's because the entire system is bullshit [youtube.com] and if it weren't for the government throwing MASSIVE amounts into the market most of those "experts" would be in the bread lines with the peons. Take a look at the charts, how we went from an average of 20% GDP in the market for over a century to over 400% GDP in the market in the last 30 years. That's the government throwing money into the market both directly with the bailouts and with tax laws like 401b.

        Sooner or later the bubble is gonna burst though, they can't magically print more money forever and as it is now unless you are an insider its all a shell game. You simply can't tell what a company's true value is because so much money has been thrown into the market chasing so few stocks it distorts the whole system, it also rewards the short term only thinking that has trashed so many companies. Get a new CEO, have them do a slash and burn, stock goes up, CEO cashes out and moves on, company is SOL.

        Watch the video, its quite enlightening and has the numbers to back it up.

    • by Kelbear (870538) on Thursday August 02, 2012 @01:08PM (#40857901)

      To elaborate, I've considered the possibility that, in response to an event, the market's ability to "value" that event takes place as a result of a series of transactions from all participants. For example, a 10 cent stock having a negative press release, and thus a participant wants to sell for 5 cents, and someone else takes that deal, pushing the market price down to 5 cents, while another thinks 5 cents is too low and is willing to buy for 7 cents. pushing it back up, then the first participant changes his mind and buys for 6 cents... Eventually the market settles on a revised price by closing time which has accounted for the "value" of the negative implications of that press release. Thus flash transactions between seconds help find that revised price faster, and the ability of many people to determine appropriate pricing is a valuable thing since it moves capital towards deserving investments which have valuable productivity and society as a whole sees higher productivity and potentially the related benefits.

      But if everyone puts in their guess at 00:00:00, then has to wait until 00:00:01, they will still have all of the relevant positions of market players (the only information that has changed) and can factor that into their 00:00:02 positions. Ultimately, all of those would-be flash transactors will just have to accept the 1-sec interval results as the average of information gained from all the thousands of millisecond transactions that would have taken place right? Basically, I don't think millisecond guesses are any faster than 1-second guesses at finding the true value of an investment. It just takes true analysis out of the picture and brings in the potential for flash-crashes from unsupervised automated trading.

      But I'm just a layman here, I'd like someone with more insight or experience to help me make sense of this.

      • by cp5i6 (544080) on Thursday August 02, 2012 @01:50PM (#40858527)
        This is also where Knight's algorithm potentially screwed up.

        usually firms will put in limit orders. ie I believe it's this so therefore don't go above or below that target to transact

        Also what you are missing is that NYSE just "matches" trades. 1 second "guessing" ignores that fact that no matter what you guess, if there is no match, there is no trade. And since not all the market makers enter their prices at the same time, not everyone waits around at the same time.

        here's an exaggerated example
        Take enron when they released their financial misreporting scandal.
        Imagine if every one had to wait 1 hour before prices get updated and transacted.
        The stock was at 72$
        Everyone in the world just puts in a short @ 72$ because we ALL know what's goign to happen to this stock
        At the end of the hour, every one and their extended relatives has shorted Enron @ 72$.
        Now, as the exchange, what gets executed? Chances are, nothing. All those buyers on the other side already knew that 72$ is a terrible buy and would have all pulled prices. You now have 0 liquidity.
    • by jgtg32a (1173373) on Thursday August 02, 2012 @01:10PM (#40857947)
      IIRC it also provides price stabilization as well. Companies don't dump huge amounts of stock all at once they trickle it out little by little as it sells. Apparently that's also part of the reason for that flash crash a few years back. They just dumped all the stock on the market and the algorithms all freaked out.

      The above is all hearsay, my brother is into that stuff and this is what I remember of what I was told.
    • My only question is why set it to 1 second intervals, and not say 1 hour or day or month intervals. What difference does it make?

      My understanding is that it takes time to arrive at price discovery. If you prolong-ate the time interval, it takes more to arrive at the actual price the forces determine.

      Besides I dont think 1 second intervals will stop these algorithms. It will only give the algorithms more time to reverse engineer trades and intentions, and build strategies.

      • If you prolong-ate the time interval, it takes more to arrive at the actual price the forces determine.

        Why? It actually gives you more time to consider what a fair price is.

        It's the total time required to come to a fair price that's the same. Not the number of time intervals.

    • by xs650 (741277)

      A common defense of flash-trading is that it provides market liquidity in that it provides counterparties to the desired transactions of the rest of the market.

      If fleas could talk they would tell us how they benefit dogs.

      But I've yet to see someone discuss how the added-value of millisecond liquidity is substantially superior to having exchanges post transactions in 1-sec. intervals to discourage millisecond arbitrage during which no new events have occured and no new market analysis has taken place, only speculation and playing the system against proper investors? Can someone illuminate me on this point?

      I would go for a longer period that 1 second, although 1 second would be an improvement.

    • HFT for dummies (Score:3, Informative)

      by ShanghaiBill (739463)

      Can someone illuminate me on this point?

      I'll give it a try. High Frequency Traders (HFTs) are not investors, they are market makers. They find a willing buyer and a willing seller, arrange the transaction, and execute the trade. They make a profit on the spread between the buy price and the sell price. The problem is that once they locate the buyer and seller, they need to buy the stock from the seller first, then turn around and sell it to the buyer, but the buyer may have cancelled they transaction, or they may have already bought the stock

      • Re:HFT for dummies (Score:4, Informative)

        by makomk (752139) on Thursday August 02, 2012 @02:38PM (#40859201) Journal

        What's wrong with HFT? Well, apparently, HFT traders taking out the stream of pricing data available to non-HFT individuals by spamming the market with order cancellations [nanex.net] and then using the fact that, because their expensive premium pricing data streams weren't affected, they had prices that were several hours more up to date than everyone else to make bank. Amongst other things.

      • Re:HFT for dummies (Score:5, Informative)

        by cpm99352 (939350) on Thursday August 02, 2012 @03:12PM (#40859633)
        The problem w/ HFT is buy/sell orders get placed and then immediately (less than a second later) cancelled. The HFT algo puts out the trade with no intent of actually executing the trade.

        That is a violation of the rules, but strangely enough, the SEC sees no need to take action.

        It is also questionable if the HFT algo actually has the cash on hand behind the order at the time the order is placed.

        The idea that HFT injects liquidity is up for debate, as we see the HFTs turned off at times of crisis. Thus, no one will step in to backstop the market. Otherwise if the HFT were working to ensure liquidity there would be no such thing as a flash crash.
      • Re:HFT for dummies (Score:5, Insightful)

        by ceoyoyo (59147) on Thursday August 02, 2012 @03:23PM (#40859751)

        That all sounds very good, until you realize that the HFT is just playing the part of a middleman, adding, well, no value to the exchange. Without the HFT the buyer and the seller would just talk to each other, negotiate a price, and the seller would get more for his stock while the buyer paid less. The only one who loses is the HFT, who is revealed as being superfluous. Middlemen used to be necessary. They're not anymore.

        Transaction costs HAVE come down. It's hard to tell how much of that is due to HFTs, and how much is simply due to improving technology. It used to cost me $0.50 to pay my utilities bills and now it costs me zero. Actual transaction costs would have come down anyway, but it's possible the popularity of HFT helped push the offered price down faster than otherwise.

        I also don't really think there's anything wrong with HFT, per se. If you do it and mess up, too bad. There is a problem though - when HFTs screw up, they screw up big, and the exchanges, governments, etc. seem to think they should be bailed out or have bad trades cancelled (which happened in this case). That gives HFT an artificial advantage, encouraging more people to do it (or give their money to companies that do it).

        Personally, because people are people, I think a one to ten second delay on trades would be an excellent idea. It would level the playing field as well - someone with an office on Wall street wouldn't have an advantage over someone elsewhere anymore.

      • Re:HFT for dummies (Score:5, Insightful)

        by johnjaydk (584895) on Thursday August 02, 2012 @03:33PM (#40859893)

        First, the added liquidity from HFT market makers are largely fake. They cancel 90 percent of their orders before they are executed.

        Second, these market makers trade at a discount at the exchanges due to the maker-taker deals. This tips the playing field in their favor.

        Third, HFT outfits utilize special order types that are moved to the front of the execution queue and therefore they can do front running on a massive scale. This causes regular buyers and sellers to take a hit.

        HFT is such a dominant force in the equity market that it amounts to 75 percent of all US stock trades. This have caused the the average time that an investor holds a stock to drop to 11 seconds. With those numbers, the consequences for volatility are pretty obvious.

        The best part is that the exchanges are in on the scam and are beholden to the HFT outfits least they take their business elsewhere.

        All of this comes out of Your 401(k) and other long term investors not to mention the damage to the economy at large. Companies are already backing away from raising capital in the stock market because it's so obviously rigged. Likewise, investors are moving into dark pools in order to protect themselves from excessive front running.

      • Re:HFT for dummies (Score:4, Interesting)

        by citylivin (1250770) on Thursday August 02, 2012 @03:37PM (#40859969)

        "The problem is that once they locate the buyer and seller, they need to buy the stock from the seller first, then turn around and sell it to the buyer, but the buyer may have cancelled they transaction"

        So what value are they adding? Seems like you are describing a useless middleman which uses computers and enormous wealth to stand in the way of two parties negotiating on a price. The middleman does not intend to invest in the company that they are trading, they are just skimming off the top. This drives up the price for everyone, and makes money for the middleman. Why is the exchange itself not matching up buyers with sellers? why do we need these third party traders doing it? Surely a computer can take a sell price and match it up with someone who wants to buy it. Why have the middlemen artificially inflating the price automatically? You seem to be saying that these people should not have to incur any risk in that 1 or 10 seconds. Why? they are gambling with no risk, if their trades always go through and they always inflate the prices people pay, and rip off the sellers.

        Sounds like common sense to me. Society as a whole should be working to eliminate middlemen, people which add no value. Why by a car from a dealership when you can order it on the internet for a fair price (the same as everyone else would pay) with no negotiation required.

      • Re: (Score:3, Insightful)

        by HeckRuler (1369601)
        Wow "market makers". That makes total sense. They connect buyers with sellers.
        Gee, if only there was a place [wikipedia.org] people could go to post what they wish to buy and/or sell without some asshat in the middle eating their lunch?
      • Re:HFT for dummies (Score:4, Interesting)

        by rundgong (1575963) on Thursday August 02, 2012 @03:45PM (#40860117)

        ... they are market makers. They find a willing buyer and a willing seller ...

        Then they are not making any markets. It's not like the real buyer and seller wouldn't find each other if the HFT was not there. It's just that they would find each other a millisecond later.
        All they do here is steal some profit from the real investors. If the buyer is willing to buy at 3 and the seller is willing to sell at 1, they should meet at 2. Not give the difference to the man in the middle who happened to have a shorter network cable in the stock exchange server room.

        Since the introduction of high frequency trading, transaction costs have fallen considerably, saving plenty of people a lot of money.

        I would say you have confused correlation for causation.
        Computers getting faster and cheaper have made transaction costs go down. HFT just happened to grow big at the same time.

        Now, let me turn the question around. What is wrong with high frequency trading? Other than people ranting about something they have made no effort whatsoever to understand, I haven't seen a single good argument against it.

        Thats exactly what I was thinking about people arguing for it. I have never heard a single good argument for it.
        The real investors don't benefit, and the companies don't benefit either. But hey, the man in the middle makes a fortune until he crashes the market, so that's gotta be worth it, right?

        HFT was originally blamed for the 2010 "flash crash" but the full investigation found that HFTing actually made is less severe.

        I have never heard of this before, but I am very interested in a citation so I can read more about it

        • by olau (314197)

          If the buyer is willing to buy at 3 and the seller is willing to sell at 1, they should meet at 2.

          And this happens exactly how? They start negotiating over a cigar and a bottle of rum? Have you ever actually tried this?

          With a stock exchange, what happens here is that either the buyer comes first in which case the seller sees his offer and sells for 3, or the seller comes first so the buyer sees his offer and buys for 1 (subtracted trading fees of course). They will never meet at 2. So that's why one of those poor sods will always come out with -1 while the other gets +1 compared to the average.

          If you ad

      • Re:HFT for dummies (Score:5, Interesting)

        by sjames (1099) on Thursday August 02, 2012 @06:37PM (#40862205) Homepage

        Imagine If I walked around the grocery store and every time someone went to take something off the shelf I knocked them down and cleared the shelf. After they leave in frustration, I sell them what they wanted for a slightly higher price. If they say no, I toss the food back on the shelves and tell the grocer "just kidding!". I am a high speed grocery trader!

        For some reason, the cops don't arrest me. Perhaps because they know that if they look the other way, I might hire them for more than they will ever make as a cop.

  • Too bad (Score:5, Interesting)

    by sanosuke001 (640243) on Thursday August 02, 2012 @12:56PM (#40857727)
    I'd tell the firm "too bad". It shouldn't be up to the NYSE to make sure companies don't do something stupid. Back in time a ways, when someone tried to game the system and then failed hard they would be ignored and forgotten. Now, with bailouts and do-overs and participation trophies, we ignore hard working americans who don't expect handouts and reward those who don't want to take responsibility for their actions.
    • Re:Too bad (Score:5, Funny)

      by pnutjam (523990) <slashdot@bAUDENorowicz.org minus poet> on Thursday August 02, 2012 @01:17PM (#40858083) Homepage Journal
      They did save the game before running the software.
    • Moral Hazard (Score:5, Insightful)

      by wren337 (182018) on Thursday August 02, 2012 @01:21PM (#40858127) Homepage

      No way any of these trades should be unwound. You want to give an algorithm your wallet and let it make lightning trades on your behalf? Fine, but learn to live with the consequences.

      • Re:Moral Hazard (Score:5, Insightful)

        by alphred (1920232) on Thursday August 02, 2012 @02:34PM (#40859147)
        Dude, it's Wall Street. They don't have to live with consequences.
      • Re:Moral Hazard (Score:5, Insightful)

        by th1nk (575552) on Thursday August 02, 2012 @02:53PM (#40859389)

        No way any of these trades should be unwound. You want to give an algorithm your wallet and let it make lightning trades on your behalf? Fine, but learn to live with the consequences.

        These trades aren't being unwound to protect the company with the "glitch". Remember that for every transaction there is a buyer and a seller.

        Let's say you owned one of those stocks and had a stop loss in place so that your shares would sell if the price dropped by 25%. You would have been hit and sold your stock near the low on a "glitch".

        Still think they should let all the trades stand?

        • Re:Moral Hazard (Score:5, Insightful)

          by ShanghaiBill (739463) on Thursday August 02, 2012 @05:17PM (#40861381)

          Still think they should let all the trades stand?

          Yes! Anyone dumb enough to use a "stop-loss" order deserves what they get. If you invest in a company, it should be because you think it is worth more than its current valuation. So why would you want to automatically sell it if the prices goes even lower? If the price goes down, you should logically want to buy more, not sell what you have.

          Anyone using stop loss orders does not understand the purpose of investing, and should not be investing in individual stocks.

    • > NYSE to make sure companies don't do something stupid

      NYSE casino crew are happy observers here, they profit from these fast trader pigs, they get fat fast, then slaughtered fast, making NYSE rich in the process.
    • Re:Too bad (Score:5, Informative)

      by cp5i6 (544080) on Thursday August 02, 2012 @01:33PM (#40858287)

      I'd tell the firm "too bad". It shouldn't be up to the NYSE to make sure companies don't do something stupid. Back in time a ways, when someone tried to game the system and then failed hard they would be ignored and forgotten. Now, with bailouts and do-overs and participation trophies, we ignore hard working americans who don't expect handouts and reward those who don't want to take responsibility for their actions.

      Actually, NYSE did tell them exactly that.

      Knight is on the hook for the full 440mm USD loss. NYSE stuck them with every single trade that they transacted during the particular time span.

      And before you spew the bailouts/ do-overs/hard working american rhetoric, let's actually review the facts related to the topic on hand.

      -Knight is a market maker. Their sole purpose on NYSE to ensure liquidity and make money. They do it by actively stepping in to sell and buy particular securities. There is nothing there that "games" the system.
      -They rolled out a new application mid week and apparently turned it on without fully testing it causing a huge spike in volume
      -The algorithm, rather stupidly, bought high and sold low.
      -NYSE actually called within 30 minutes Knight to inform them that they might be accidentally executing incorrectly
      -Knight basically ignored the warning and let the algorithm run for a full hour.
      -End of the day, Knight is on hook for the entire loss. Not because it was a "mistake" but because these are all legitimate trades with legitimate counterparties and didn't violate any rules.
      -Nyse has stated that and has said there would be no further appeals allowed on the issue.

      • Re: (Score:3, Funny)

        by MarkGriz (520778)

        -The algorithm, rather stupidly, bought high and sold low.

        “I always do that. I always mess up some mundane detail"

  • by JDG1980 (2438906) on Thursday August 02, 2012 @12:57PM (#40857729)

    Yesterday an update to Knight Capital Group's algorithmic trading software caused massive volume buys and sells, resulting in large price swings on the New York Stock Exchange. As a result, the NYSE canceled some of the trades...

    So if I were to write an auto-trading script using the eTrade API [etrade.com], and as a result of a bug it made bizarre trades and I lost a lot of money, would the NYSE agree to cancel those trades? Didn't think so. Why should the big boys get a second bite at the apple? If you write an algorithm to do trading, then from the POV of the stock markets, that algorithm is you. (Just like the way user permissions work in Unix/Windows.)

    Allowing mulligans and do-overs when well-connected firms make mistakes is only going to reinforce the perception that Wall Street is a casino rigged in favor of the rich.

    • by Genda (560240) <mariet@@@got...net> on Thursday August 02, 2012 @01:06PM (#40857865) Journal

      Because they're the big boys. Trade billions and its presumed you should be taking everyone else's money, and if you fsck up somehow, they just say sorry and hand the money to you. Welcome to world where might is right.

    • They're not do-overs (Score:2, Informative)

      by Anonymous Coward

      Yesterday an update to Knight Capital Group's algorithmic trading software caused massive volume buys and sells, resulting in large price swings on the New York Stock Exchange. As a result, the NYSE canceled some of the trades...

      So if I were to write an auto-trading script using the eTrade API [etrade.com], and as a result of a bug it made bizarre trades and I lost a lot of money, would the NYSE agree to cancel those trades? Didn't think so. Why should the big boys get a second bite at the apple? If you write an algorithm to do trading, then from the POV of the stock markets, that algorithm is you. (Just like the way user permissions work in Unix/Windows.)

      Allowing mulligans and do-overs when well-connected firms make mistakes is only going to reinforce the perception that Wall Street is a casino rigged in favor of the rich.

      The reason they cancelled Knight's trades was not to save Knight from its incompetence; it was because those large, erratic transactions were radically altering the price of securities for everyone, including small traders. Those cancellations did not, necessarily, save Knight any money.

      Your eTrade script could only influenece the market that if it was able to buy or sell huge volumes, which it probably can't since you probably don't have that much money in your eTrade account.

    • Re: (Score:3, Informative)

      by ranton (36917)

      It looks like it is too soon to know exactly why some trades were cancelled. The official word from the NYSE is that companies whose stock rose over 30% today's start price had their trades cancelled. But the NYSE also launched their Retail Liquidity Program (RLP) today, so it may not just be a coincidence that this problem happened today.

      Whether anyone likes it or not, the stock exchanges do take steps to help ensure that the markets function rationally. When things get out of whack, no matter who does

    • Allowing mulligans and do-overs when well-connected firms make mistakes is only going to reinforce the perception that Wall Street is a casino rigged in favor of the rich.

      Good, I hope everybody finds out.

    • by na1led (1030470)
      It's worse than a Casino. Look what happened to Hedge Funds in 2008.
    • by istartedi (132515)

      This is why I would never, Ever, EVER script a trade. Ever. Let me repeat that for those who might still be tempted to use those trading platform "features". NEVER DO IT.

      It's bad enough that I might botch the script, but they might botch it too.

      Also, there's a saying in Vegas: speed kills.

      Why, praytell, would anybody want to accelerate their trading? It makes sense if you're a market maker who can reliably make money on spreads and volume; but that's not Joe Blow using eTrade API or any other such carr

    • by PRMan (959735) on Thursday August 02, 2012 @01:55PM (#40858633)
      No, but if you MADE money with your own software by finding a weakness in their algorithms, they would cancel it and arrest you: http://www.financial-planning.com/news/norwegian-day-traders-timber-hill-2668351-1.html [financial-planning.com]
      • by sjames (1099)

        Yep, we can't have the riff-raff getting all uppity and thinking they can make money like a 1%er!

      • Re: (Score:3, Informative)

        by Clifton Beach (809210)
        Fortunately they were cleared [ft.com]:

        Two Norwegian day traders who outwitted the automated trading system of a big US broker have been cleared of all wrongdoing by the country’s highest court.

  • On the one hand, algorithmic trading can screw up royally and cost hundreds of millions in a matter of hours. On the other hand, human traders can screw up royally and cost billions over a few months.

    I'm not sure which is worse. And of course in combination they can crash national economies.

    • That's like saying you're not sure whether it's worse to lose control of a landspeed car at 600kph or a go-kart at 60kph. One allows time for humans to react.

  • by cpm99352 (939350) on Thursday August 02, 2012 @01:00PM (#40857769)
    Today, after the stock dropped 50%, analysts are beginning to downgrade the stock from buy to hold. Excellent analysis there!!!

    http://finance.yahoo.com/news/knight-capital-downgraded-hold-buy-155956204.html [yahoo.com]
    • That what they get paid the big bucks for. It takes an experienced business leader to make these decisions.

  • Apparently, losing 70% of their market cap in one day and shopping themselves around frantically hoping to be "acquired" before they go bankrupt is just "day-to-day minutia" for their CEO.
  • I am so against this robotic, automated, whatever-you-want-to-call-it trading that it serves Knight Capital Group right. I'm dancing a jig in the streets.
  • Why not just a single trade resolution per day ?

    Currently it is a race to be fast and their are all sorts of manipulations about being fast and doing algorithmic trading.
    Dropping back to a single trade resolution per day would make it so much cleaner. Or may as many as 4 just to keep the traders occupied.

    Trades would be done with 2 parts. The trade info which would be encoded and a seprate unlock key. The trade and key are kept separate until resolution begins. That way trades can be logged, verified and l

    • by bobbied (2522392) on Thursday August 02, 2012 @03:21PM (#40859735)

      Why not just a single trade resolution per day ?

      Because traders would then just trade directly with each other or set up their own exchanges. If Emron was bad, think what would happen if the huge brokers simply decided to just trade directly with each other, or worse they set up "third party" exchanges to trade securities? The exchanges would then loose the fees they charge.

      You can trade stocks and bonds on the street corner, at the farmer's market, in you living room. We just don't do it because it is hard and expensive to trade stock certificates in small numbers. Limiting trades to one per day would just encourage transactions to take place off the exchanges.

  • by turkeyfeathers (843622) on Thursday August 02, 2012 @01:06PM (#40857871)
    Some programmer's going to lose their job over this error that resulted in a $440 million loss. If the programmer had done the job properly, Knight would have lost $1 billion and been eligible for a government bailout.
  • Simple solution (Score:5, Insightful)

    by nedlohs (1335013) on Thursday August 02, 2012 @01:09PM (#40857929)

    Don't cancel the trades. If some idiotic "investment" firm lets a computer program spend hundreds of millions of dollars in seconds then good for them. They get to keep the profits and the losses.

    If one of your human trader makes a typo or a computer program has a bug then bad luck, they should have had checks and limits to make sure it doesn't do too much damage to them.

    The rest of us don't get do-overs.

    Heck just last month I when trying to limp in $2 poker game I picked up two $100 chips and threw them forward by mistake - I didn't get do-over even though everyone at the table new I made a mistake, my $198 raise into a $5 pot plays.

    I'm pretty sure if I accidentally typed 100 instead of 10 when making a trade on schwab.com I'm not getting a do-over if the trade completes.

    • by gknoy (899301)

      when trying to limp in $2 poker game I picked up two $100 chips and threw them forward by mistake - I didn't get do-over even though everyone at the table new I made a mistake, my $198 raise into a $5 pot plays.

      Perhaps this is natural to poker culture, but to an outsider I can't help but think that your friends are jerks. :-) Perhaps you weren't playing with friends, which might make it more excusable, but it still seems unnecessarily harsh to say "no, those chips stay" when someone says, "ah, crap, I meant to throw in these instead." (Assuming you caught the mistake when you did it, that is.) Pretty much everyone I'd consider playing cards (or other games) with would notice the outlier and say something like, "D

  • This is Karma in action. The little guy gets some payback!

    -Matt

  • You gotta wonder about the stability of the whole banking/investment/trading when a single bug can jack a major exchange around....

    • by gl4ss (559668)

      a single bug backed with a lot of cash.
      that's kind of the limiting factor.

      this wasn't just a single bug btw. unless the single bug was turning all safeties and stops off.

  • Too bad, so sad.. (Score:4, Insightful)

    by n5vb (587569) on Thursday August 02, 2012 @01:12PM (#40858001)

    If they didn't sufficiently analyze the code they were going to turn loose in real time trading, and it did something they didn't expect it to do, then that's their screwup, and theirs alone, and they need to own it. Period.

    I can see NYSE cancelling some trades because the volume of trading was getting people confused about what the pricing should be, but I can't see it as fair that they'd cancel trades as a favor to the company. If a day trader screws up and takes a bath on a stock due to poorly-thought-out trade orders, they don't get a do-over, those trades are placed and cleared and they're done, no going back. I don't see any reason wild program trades should be held to any lesser standard, and I see plenty of reasons why they shouldn't be. What the company needs to do is get some competent programmers in to code their algorithms properly, and get some competent analysts in to double check the coders' work and validate the algorithms, and be prepared to own their own s**t if the code does something like this. Sorry, no sympathy, these guys should d**n well know better.

    • by tekrat (242117)

      But... but... you don't UNDERSTAND...
      The CEO is part of the 1% and DEMANDS that his losses be subsidized by the "little people" -- I mean, how else is he going to buy that gold plated yacht he had his eyes on earlier this week?

      You surely do not expect a 1%'er to actually own up to his own mistakes, and gosh, maybe have to sell his 7 Lamborghinis, his 10-acre Florida Estate, and maybe 3 or 4 of his New York condos to make up that loss? The horror!

      He demands a bail out from the American taxpayer. How else can

  • You couldn't ask for a louder "demand" than a $440M loss.

  • by hawguy (1600213) on Thursday August 02, 2012 @01:19PM (#40858119)

    Why make a comparison with an event 15 years ago and ignore the different in value of the dollar?

    Intels FDIV bug costs of $475M in 1994 is equivalent to $735M in today's dollars [usinflatio...ulator.com]. I guess it's just not as impressive as saying "The cost of this glitch was a bit over half of the $475 million charge Intel took for the Pentium FDIV Bug."

    If you want to make it sound more impressive, go back further in time "This loss was greater than the entire GDP [usgovernmentspending.com] of the united states in 1955 (ignoring adjustments for inflation)"

  • This is exactly why I prefer writing games that sell for 99 cents on iTunes over writing either financial or healthcare (which I did for years) software. Much more fun, and more importantly, greatly reduced ramifications if something does go wrong.

  • Okay if a stock moves over 15% within a couple minutes then that stock should be set to trade at 5 minute intervals for the next 4 hours (so you have to hold the stock for 3:59.00 minutes if you buy it when this trips). Any trading house attempting to trade outside Normal Limits gets put on a 1 hour delay (so they do a trade and it takes 1 hour to commit).

    In short subsecond trading should not be able to cause wide swings in values (that multisecond trades can't also do)

  • ... die by the sword, obviously.

  • made a few million dollars in seconds and is very happy - assuming this isn't just some emergent behavior "bug."

  • Why don't exchanges batch up all of the trades received in one second (or 5 or 10 or 60 second) intervals and execute them in random order?

    There's no sane reason in a fair market why someone whose computers are located a few milliseconds (or nanoseconds) closer to the exchange should get his trades served before the guy who lives a bit farther away and is constrained by the speed of light.

    Does HFT help the markets in any way?

    Though I guess one benefit side effect of high frequency trading is that it'll help

  • by JazzHarper (745403) on Thursday August 02, 2012 @06:30PM (#40862147) Journal

    Contrary to TFS, Knight was not running algorithmic trading. They are a "market maker" for retail brokerages, like Fidelity, Vanguard, E-Trade and, in particular, Scottrade. (About 40% of Scottrade's traffic was going through Knight). The NYSE had just brought a new retail trading interface on-line, and Knight's software did not conform correctly to the protocol. As a result, it kept re-entering the same orders, over and over. These were small retail orders, just a few hundred shares each, but they were submitted to the exchange thousands of times.

    The two outstanding questions are: Why was their interface not tested properly and why did it take them over 30 minutes to pull the plug?

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