Algorithmic Trading Glitch Costs Firm $440 Million 377
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)."
Why the double standard? (Score:5, Insightful)
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.
Re:Visual walkthrough and commentary of the mayhem (Score:5, Insightful)
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.
Re:Defend flash trading? (Score:5, Insightful)
Re:Defend flash trading? (Score:5, Insightful)
What part of wealthy, powerful people with vast computing power screwing the general public do you not understand?
Re:Why the double standard? (Score:4, Insightful)
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.
Re:Defend flash trading? (Score:5, Insightful)
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.
Simple solution (Score:5, Insightful)
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.
Too bad, so sad.. (Score:4, Insightful)
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.
Moral Hazard (Score:5, Insightful)
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:Why the double standard? (Score:4, Insightful)
Re:Moral Hazard (Score:5, Insightful)
Re:Moral Hazard (Score:5, Insightful)
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:Why the double standard? (Score:3, Insightful)
but if you sold when it had gone 30%, sold to kcg.
then you made a cool 30%. why shouldn't you get to keep the money? what possible rationale could you be offered for backsies? "hahaa just joking!"?
Exactly. If wall street is edging things so that the errors are always in favor of their big buddy high frequency trading firms, then firms will start making these kinds of errors on purpose, and roll back to the save point when they fail to beat the boss.
Re:Why do we need uSec trading? (Score:5, Insightful)
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.
Re:HFT for dummies (Score:5, Insightful)
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)
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:3, Insightful)
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:Moral Hazard (Score:5, Insightful)
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.