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Businesses Bug Programming The Almighty Buck

Wall Street and the Mismanagement of Software 267

CowboyRobot writes "Last week, a bug in high-frequency trading software from Knight Capital Group resulted in erroneous trades costing almost a half-billion dollars. So, what went wrong and how can they, or any other software developer, prevent something similar from happening again? In hindsight, it's clear that the developers did not verify the code under enough conditions. But the real issue is how these high-frequency trades work in the first place. Robert Dewar at Dr. Dobb's suggests the financial industry needs to take a page from the avionics rulebook, which has very strict guidelines about what code can be implemented due to the high cost of failure in that field. 'High-frequency automated trading is not avionics flight control, but the aviation industry has demonstrated that safe, reliable real-time software is possible, practical, and necessary. It requires appropriate development technology and processes as well as a culture that thinks in terms of safety (or reliability) first. That is the real lesson to be learned from last week's incident. It doesn't come for free, but it certainly costs less than $440M.'"
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Wall Street and the Mismanagement of Software

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  • by dutchwhizzman ( 817898 ) on Friday August 10, 2012 @09:09AM (#40944753)

    It should be called high frequency gambling and taxed as such. It has nothing to do with the (perceived) value but only with a gamble on what the sentiment and competing algorithms will produce as the next stock or derivative price.

    Any derivative trade and any stock trade that is done within 28 days of purchase should be taxed as gambling. It's nothing more or less than that so it's fair if these big online casino's get their profits taxed so the rest of us can profit too.

  • Test People (Score:4, Interesting)

    by stuffduff ( 681819 ) on Friday August 10, 2012 @09:15AM (#40944823) Journal
    "Anyway, no drug, not even alcohol, causes the fundamental ills of society. If we're looking for the source of our troubles, we shouldn't test people for drugs, we should test them for stupidity, ignorance, greed and love of power." -- P. J. O'Rourke
  • by fuzzyfuzzyfungus ( 1223518 ) on Friday August 10, 2012 @09:30AM (#40944959) Journal

    The really troubling thing (to my mind) is not so much the 'what does Wall St. produce?' question(which, as you note, is ostensibly 'capital allocation'; but the 'how efficiently do they actually produce it?' question.

    In a non-pathological market situation, you would hope to see Wall St.'s share of the economy as a whole be static or declining(as newer technology makes allocating capital easier and less expensive) and the demand for 'capital allocation' exist only so far as other business sectors find that more efficient capital allocation makes them more efficient and productive(in the same way that you would want to see any other support function of a business kept in line with the business overall. You wouldn't want your IT group consuming a greater percentage of your total economic output every year). Trouble is, that isn't what the numbers reflect.

    Instead of acting as other suppliers do, and having their health and size depend on the success of the customers, the financial services sector has managed to capture a steadily increasing share of the value relative to other sectors. Absolute growth would be one thing, if the economy as a whole is growing; but relative growth, in terms of percentage of total output captured, suggests a substantial increase in the market(and regulatory) power of financial services without necessarily any increase in the value of their product to their customers. That is bad.

  • by Dan Dankleton ( 1898312 ) on Friday August 10, 2012 @09:42AM (#40945089)
    Oh, for an "I wish it weren't true" moderation.
  • Re:Completely wrong (Score:2, Interesting)

    by Anonymous Coward on Friday August 10, 2012 @10:01AM (#40945323)

    You are correct, this was not HFT. But the test software theory that Nanex put out is I believe wrong. First, it does not match the facts, there were not enough trades and enough spread to justify the losses.

    From parties involved in the matter I heard that their agency router had a latent bug, triggered by the changes introduced to support NYSE's RLP. The agency router incorrectly handled out-of-the-money limits as pegged orders, creating principal positions. The desk saw the principal positions, scanned all the principal strategies, saw no positions there and concluded the positions were errors. They never thought to look at the agency router because, well, it is the agency router, it *never* creates a position.

  • by dkleinsc ( 563838 ) on Friday August 10, 2012 @11:00AM (#40946093) Homepage

    This increase in the relative growth of the financial sector was one of the predictions in Karl Marx's Das Kapital: He saw bond markets and stock markets as the natural and predictable outgrowth of the role of a capitalist, which in his view was somebody who made their living not by producing stuff but by buying the means of production and making other people produce stuff. Bonds in particular simply abstract the concept completely away from any actual work: The capitalist now doesn't even do the buying and managing himself, but buys bonds allowing somebody else to do that work and demands a portion of the proceeds of the firm in return. As the capitalist class gains more and more wealth, the trade in bonds and other financial instruments goes up as a percentage of the economy, while the industrial and agricultural production becomes less important.

    (And no, I'm not arguing that workers of the world should unite and revolt, just that Marx was a serious economist who made some good points about how capitalism works.)

  • by malkavian ( 9512 ) on Friday August 10, 2012 @11:14AM (#40946323)

    That's the thing about "not doing anything retarded". There's a lot of things that can fit that description. The frame problem is what killed classic AI, and it's exactly the core of this problem. And it's probably more a problem for financial trading than it is for avionics.
    To get around that, you need a base set of heuristics from the experts. That's what a spec document is for, to determine the limits and boundaries along with the exact operation. I suspect that a fair bit of this gets rushed through in the attempt to get an algorithm out that's better able to play your opposition before your opposition gets their own one out that'll toast yours.
    Political pressure comes from on high to "get things moving now, what's the hold up?", and pressure is applied to the front lines to move it.
    Which comes back to a management failure. Some things take time to get right, and you have the option of managing the environment to allow for the latency until things come out right (which is a fairly meaty task, but means you largely go from stable state to stable state), or you can utilise politics to speed things up (and this frequently means corners are cut; always a risk, hopefully calculated, frequently not). This often means going from a stable state to an uncertain one, with the hope that things won't go bad enough, and you can fix stuff on the fly.
    Programmers aren't the ones in complex enterprises that should decide what's sane and what's not. That's for the people who have the experience in the field. If that info doesn't get passed on, it's pointless blaming a programmer (hey, go program exactly what I'm thinking of without telling you, and get it right!).
    Doing things the right way takes time and money. Financials are usually willing to spend money, but they're very used to getting things "now".
    That's something they may need to re-evaluate, and go back to the more old fashioned way of doing things, and taking time to ruminate, and double check.. They'll lose the maximum possible profit point, but keep things stable and still profitable.. Alas, many of them don't consider that acceptable, and want it all, and want it now.

  • by mspohr ( 589790 ) on Friday August 10, 2012 @12:34PM (#40947509)

    I think the problem is that Knight doesn't pay any fees so is free to do as many trades as possible at no cost. This makes programmed trading possible.
    If there was even a very small fee (as some people have proposed), then the high speed programmed trading would not be profitable.
    Knight and others doing this type of trading are profiting from very small changes in price which they can see from their order book. They are "front running" the market and this has been illegal but I guess it is so profitable that the authorities are encouraged to ignore the man behind the curtain.

God help those who do not help themselves. -- Wilson Mizner