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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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  • 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: []

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

    by Anonymous Coward on Thursday August 02, 2012 @01:11PM (#40857981)

    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 [], 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.

  • by ranton (36917) on Thursday August 02, 2012 @01:18PM (#40858105)

    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 it, they step in try and maintain some level of order. If you did something on your own that swung the markets by hundreds of millions of dollars, then they would step in to stop you too.

    It isn't like the Knight Capital Group was given a get out of jail free card. They lost $440 million. They also lost over 50% of their worth in the stock market, for a loss of about $385 million.

  • 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 []. 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 [] of the united states in 1955 (ignoring adjustments for inflation)"

  • 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.

  • by Anonymous Coward on Thursday August 02, 2012 @01:50PM (#40858543)

    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 gl4ss (559668) on Thursday August 02, 2012 @01:51PM (#40858555) Homepage Journal

    1 second gives still plenty of edge to machines.
    even 10 secs would.

    but hft isn't even about that - it's about giving the edge to _specific_ machines near the exchange. it's bullshit. that's why they need milliseconds, to screw the rest of the market, to ask for big money for fast connections, to get a piece of the shavings.

    having something like 5 second intervals would give a chance for eliminating the good 'bro aspect of having to locate your machine at specific room near the exchange.

  • HFT for dummies (Score:3, Informative)

    by ShanghaiBill (739463) on Thursday August 02, 2012 @02:06PM (#40858793)

    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 from someone else, in which case the HFT is stuck with the stock and may have to sell it to someone else at a loss. If transactions are granulated to one second intervals, instead of say, millisecond intervals, then the risk of this happening is a thousand times higher, and the HFTs will insist on higher spreads, resulting in lower liquidity and higher transaction costs for both buyer and seller.

    Since the introduction of high frequency trading, transaction costs have fallen considerably, saving plenty of people a lot of money. The only losers are the old market makers that used to have lucrative sweetheart deals with the exchangs Many of those old market makers are now bankrupt. Good riddance.

    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. HFT was originally blamed for the 2010 "flash crash" but the full investigation found that HFTing actually made is less severe. Some HFTs have lost money because they screwed up their algorithms or fat-fingered a trade, but that is their own fault, they lost their own money, and for every penny they lost, someone else gained.

    I have no personal interest in HFT, but I find desire of so many willfully ignorant people to control the behavior of others to be pretty disgusting. The advantages of HFT are pretty obvious to me.

  • 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.

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

    That's because the entire system is bullshit [] 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.

  • 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 [] 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:4, Informative)

    by ceoyoyo (59147) on Thursday August 02, 2012 @03:33PM (#40859903)

    "So out of the top 10 worst days of the market only one has happened since the advent of HFT."

    That's misleading. You have to annualize the risk of a large drop. You can't say there was only one big drop since 2008 (four years) and nine big drops from 1900 to 2008 (108 years), therefore HFT stabilizes the market.

  • by hairyfeet (841228) <bassbeast1968@gma i l . com> on Thursday August 02, 2012 @05:05PM (#40861249) Journal

    Yes it IS bad, because by distorting the market you change it from investment to speculation, which rewards short term thinking above all. As i said you see it over and over, get new CEO, CEO does slash and burn that will destroy the company long term but in the short it raises revenue so stocks go up, CEO cashes out and walks away, company folds.

    And no throwing social security into the mix would just make it that much worse. What is the government gonna do when the stocks take a nosedive? print ever more money? Pouring all that cash into the market just turns it into a giant Ponzi scheme because the government IS on the line for those payments which have to go out every month or people end up on the streets.

    Watch the video i linked to in its entirety and he'll explain why this is bad, he explains it better than I ever could. only about 10 minutes long and I bet you'll change your tune after watching it, basically like the housing bubble it WILL pop, just a question of how truly nasty its gonna be.

  • by Clifton Beach (809210) on Thursday August 02, 2012 @07:38PM (#40862741)
    Fortunately they were cleared []:

    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.

You can tell how far we have to go, when FORTRAN is the language of supercomputers. -- Steven Feiner