Knight Trading Losses Attributed To Old, Dormant Software 223
New submitter alexander_686 points out a Bloomberg article about the cause of Knight Capital Group's $440 million algorithmic trading disaster from a couple weeks ago. The report says a dormant software system was accidentally activated on August 1, which immediately began increasing stock trade volumes by a factor of 1,000. The Wall Street Journal has further details:
"Knight Capital Group Inc.'s accidental trades earlier this month were triggered by a flawed upgrade of trading software that caused an older trading system connected to the computer code to inadvertently go 'live' on the market, according to people familiar with the matter. The errors at Knight on Aug. 1 involved new code the Jersey City, N.J.-based brokerage designed to take advantage of the launch of a New York Stock Exchange trading program, which was introduced that day to attract more retail-trading business to the Big Board, the people say. ... When NYSE Euronext trading floor officials called Knight at about 9:35 a.m. to try to pinpoint the cause of unusual swings in dozens of stocks, just after the Big Board opened for trading, Knight traders and their supervisors had a difficult time detecting where in its systems the problem was located, say people familiar with the morning's events. The NYSE had to call Knight several times before deciding to shut the firm off, the people say."
The NYSE shouldn't reverse trades. (Score:5, Interesting)
They really need to stop giving these high frequency traders these parachutes. You screw up your algo, its your own damn fault. Lost your butt on the market - oh well.
Re:The NYSE shouldn't reverse trades. (Score:5, Insightful)
The problem with that is these Wall Street companies have their tentacles everywhere. Whatever pleasure we'd get watching them crumble is nothing compared to watching our retirement savings drop to zero and millions of people losing their jobs.
"Too big to fail" and free market capitalism are fundamentally at odds.
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Revoke corporate licenses and no company will ever grow to Be too big to fail.
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Behead corporate executives for gross negligence, massive fraud, theft... Things regular people do and it gets them put in jail for half their life...
And every company (that continues to exist) WILL NOT do these things.
Make someone responsible if they want these massive paychecks.
Right now nobody is responsible for anything.
Theres always an excuse.
It's always someone elses fault.
Or the blame is spread so thin to so many there's nothing left to find.
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So we revoke the "person" status from corporations. They become tools at that point.
And like any tool which is used in a negligent manner, those responsible are held accountable.
The trouble with this plan is that every major corporation, and a large portion of their production--and thus jobs--and the associated tax revenues would likely leave the country. That would hurt. A lot.
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Yess!!! Because it's the companies that make things, and not people who work there!
Morons. All of you.
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I could see his dooms days prediction being a bit tin-foil-hatish, but the rest seems within reason.
I'm not saying that he is absolutely correct, but if you understand more of what's going on, please point out the problem with his "facts" or his reasoning as you either have more insight or you're just attempting to discredit his claims with
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Re:The NYSE shouldn't reverse trades. (Score:4, Interesting)
You really don't know what you are talking about. Sure the market can get volitile but most companies in the S&P 500 actually do have value. If you don't panic and cash out during the crash you will be fine. All of the financials in the S&P 500 are about 15%.
If you are investing long term and are diversified these panics are a good time to buy.
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None of that helps when you're 70 years old and need to cash out to retire. Not everyone is young and looking for long-term investments.
Re:The NYSE shouldn't reverse trades. (Score:5, Insightful)
There's no short term guarantees in the stock market. If you're 70 and need cash, you shouldn't be in the stock market.
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Well, if you're 70, you didn't just start investing at 69 and a half, right?
If you're 70, you probably didn't start when you got your first job (25). But you should have started at 35.
Failing that, you should have started at 40 when you first got the notion that you might not live forever, and your body first started showing signs of aging.
You probably would have 66 times your money.
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If you are 70 and going to need to cash out you wouldn't be in the stock market - unless you are an idiot of course, in which case there are plenty of other ways you'll lose your money anyway so there's no need to try and stop that vector.
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Having some money in stocks at age 70 is ok iff you have enough cash to survive 3-5 years without touching the stocks. Which reinforces GP's point that it is a good buying opportunity... Even if you are 70.
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You have to be careful. Bond prices drop as interest rates rise. This happens when they contract the money supply. No investment does well during that period in dollar terms but the purchasing power of cash increases so your cash holdings will see real gains.
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Re:The NYSE shouldn't reverse trades. (Score:5, Interesting)
Money-market funds. They invest in short-term Treasuries and top-rated debt. They try to be diversified, so even an unlikely nasty surprise won't nick you much. You won't get much of a return, but your money will be most likely safe (there's no absolute guarantees anywhere, but if the money market funds go south, there's not likely to be any safe place elsewhere). With current low interest rates, you'll probably make a return of less than 1%, though.
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That isn't true. The pure idiocy and stupidity rampant in American politics means that the US government can default, just like they came close to doing a while ago. That's why the rating on government bonds was dropped to AA - the fact that default was even being considered as a possibility is utterly mindboggling.
Economically there's no reason why the government would ever default. Instead it's the pure unadultered retardation of the politicans in this country that have ensured that an investment that sho
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If the US government defaults, then the stock marker will probably crash so badly that NO stock investment will be safe.
Re:The NYSE shouldn't reverse trades. (Score:5, Informative)
I use a method by the late great Harry Browne he called failsafe investing.
Here is the summary. Divide your investment into quarters.
25% S&P 500 stocks
25% 30 year Treasury Bonds
25% 100% Treasury Money Market (If you can find one. They pretty much all went under after they put FDIC on money markets)
25% Gold Bullion Coins
As you save add your funds to the Cash (Money Market) portion.
Every once in a while check the balances. If any gets above 35% or below 15% of your total portfolio re-balance it to 25%.
The beauty of it is that when anything bad happens it is usually people running from one of these to another. This allows you to automatically buy low and sell high.
I've averaged about 12% per year for the last 10 years. You don't get as good of a return long term as the S&P 500 but it's also less scary.
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I use a method by the late great Harry Browne he called failsafe investing.
Here is the summary. Divide your investment into quarters.
25% S&P 500 stocks
25% 30 year Treasury Bonds
25% 100% Treasury Money Market (If you can find one. They pretty much all went under after they put FDIC on money markets)
25% Gold Bullion Coins
[...]
The beauty of it is that when anything bad happens it is usually people running from one of these to another. This allows you to automatically buy low and sell high.
So in other words it's like traditional portfolio theory except worse?
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What's the return and volitility of your suggested portfolio? I'm always open to suggestions.
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Yes some money was made in gold. But during the stick crash in 2008 both Bonds and Gold did great. During that time I had to rebalance and sold both and had to buy quite a bit of S&P 500 in the 800 range. There has been a good return in that.
Also gold has stopped in the last year or so. But bond prices are going up with the low interest rates.
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What folks don't usually realize is that most stocks already have about 20 years worth of growth and prosperity priced into them. With GDP not expected to make great strides, it will be a miracle if anyone will be able to extract more than 2% real return out of their broad index funds. Similarly, no sane small-shop or pizzeria owner would be satisfied with 2-8% return... the folks selling hot dogs on the street get a higher return on their money... and yet the biggest and most profitable corporations are so
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Sure the market can get volitile but most companies in the S&P 500 actually do have value..
The perceived value and actual value are usually not even close to each other. It used to be, a long time ago, that you'd want to see a companies value as what their actual assets were worth, plus a limited amount of what "goodwill" and "market potential" would gain in the future. However, if the dividents and stock price raise due to just these factors wasn't absolutely certain to double your money in 10 years, the stock would be too expensive.
These days, it's all about what people think the market sentim
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Free-market capitalism itself needs some serious revision. Not the fundamentals of it (which are sound, as far as they go) but the pervasive dogmatic faith that markets can optimise *everything* and that money accurately captures "value" at all times, for all things. This is just one exaggerated example that highlights how absurd this dogma is. Neoclassical economics has overstepped its mark by a huge margin, to the point were the economic mainstream is desperate to continue pretending the hard science of e
Re:The NYSE shouldn't reverse trades. (Score:4, Insightful)
For everyone that looses money, some one else would gain it. If enough pension funds go bankrupt, then perhaps people will stop gambling with their money.
Re:The NYSE shouldn't reverse trades. (Score:5, Insightful)
Ah, that classic libertarian chestnut. If we just wipe out enough peoples' retirement funds, the problem will correct itself! Let me guess, you also think the FDA doesn't need to exist because if a bad drug kills a bunch of people, those people will just take their business elsewhere, right?
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For everyone that loses money, some one else would gain it.
The market is not a zero-sum game.
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Re:The NYSE shouldn't reverse trades. (Score:5, Informative)
This is not high frequency trading. Google it to learn what it is.
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Wish I had mod points, but instead I'll just add a comment to agree with you.
This whole thing has nothing to do with HFT, except that a bunch of uninformed idiots who have no idea what they are talking about have decided to spout off about HFT. Because it sounds exciting, not because it had anything to do with what happened.
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the problem was that the volume was multiplied by 1000 per transaction. you mean to buy 100 shares at market? here's your 100,000 shares at market! the unusual volume caused the individual stocks within the portfolio to spike up/down. but hft it was not.
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Well... if something is occuring at a low frequency rate and it suddenly starts occuring at a much larger rate, wouldn't it become high frequency?
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Re:The NYSE shouldn't reverse trades. (Score:5, Insightful)
The problem with that idea is that sometimes these high frequency traders also cause volatility spikes in the market, triggering other computer programs, and, sometimes, humans, to react as though the spurious trades were intentional.
While I also loathe HFT as a scourge on the market, I think the NYSE's overall response is a good one: when abnormal trades occur as a secondary effect of other's mistakes, abort them.
Note that the ca. $440 million loss Knight took was BECAUSE they couldn't unwind the bad positions they bought into. Goldman Sachs bought the entire block from them at a discount. Knight didn't get any kind of parachute.
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But why save the companies whose programs were triggered or humans who panicked? They made their choices hoping to get rich, and they lost. Sure they were operation on faulty data (one companies BIG error), but at least 50% of the 'investors' (those that lose money on a trade) do, so why make these cases something special?
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Only partially true, or perhaps, partially false. Some of Knight's trades were reversed -- I think trades where the price was 30% off the normal range. So Knight did get a parachute, just a small one.
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when abnormal trades occur as a secondary effect of other's mistakes, abort them.
I disagree. All trades should be final with no refunds, do-overs, or reversals. If the algo traders want to play with fire then it's their job to make sure that they don't get burned. They want the benefits of their high frequency trades without taking responsibility when their bets go bad. That's bullshit and the NYSE and other exchanges shouldn't allow it.
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And then all the other trading houses would have to accept their own mistakes, fat-fingered trades and so on, which is probably why the exchange allows trades to be reversed.
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Wait, the NYSE was thinking of reversing trades? Which article was that in?
Not only that, but by definition, if they reverse $400 mil of trades, they have to get that money from somebody else. It's not "the market" they'd be getting it back from, but specific investors and shareholders who sold their securities.
Can they even do that? Force people to give money back?
Or is it like Paypal where they're linked in to your bank account and can take money whenever they want?
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Can they even do that? Force people to give money back?
Yes. Because the money never actually changed hands. It was only totals on a ledger that they operate that changed. Nobody settles with actual money until the end of the day at the earliest. I think there's actually a 14 day period allowed for settlement, IIRC.
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Oh, OK, didn't know that, thanks.
Still, though, I find the idea of reversing trades distasteful.
I think it would impossible to do this without some level of favoritism.
And, of course, it's only when large traders lose money that they would do this, not when you or I lose money. ("Oops, I didn't mean to buy RIM!")
Anyone know if the Germans went through on buying NYSE (and if they're going to continue flying the giant American flags out front)?
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Where did you read that the trades were reversed? Everything that I've seen says that Knight had to eat all of the bad trades. They ended up unwinding their trades to Goldman Sachs, presumably because GS can hold onto them long enough to wait for enough of them to turn positive at some point in the future.
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They actually did reverse trades in something like 6 of the 146 affected symbols. These were stocks that were clearly trading completely out of their realistic ranges, so a small portion of trades were reversed. Though I'm sure Knight was begging them to reverse all the trades...
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They need to go one step further and just ban automated trading altogether. People make trades. Machines make transactions. As long as they call it 'trading' then it should be a human doing to button pushing.
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Knight is a market maker. The software was simply buying at the ask and selling at the bid hundreds of times per second, nothing more (a bug that is the polar opposite of how a market maker provides liquidity). How is that in any way related to HFT?
And what parachute? GS bought the accumulated position at a discount in return for cash to keep NITE afloat.
Not sure what's going on with the +5 interesting, can someone clue me in?
Re:The NYSE shouldn't reverse trades. (Score:5, Interesting)
No kidding. Although it wasn't reversed in Knight's case, there have been many flash crashes that have been reversed, making it so that profit is almost guaranteed for HF traders: good bets go through and bad bets get reversed.
I was personally affected a couple of years ago. I had an outstanding bid (limit order) on a stock at what I thought the stock was worth, although significantly lower than the going price, so I could pick it up in case there was a temporary drop due to negative news or whatever. The "whatever" happened; my open order got filled by HF traders due to a flash crash they caused in that stock. I got a call from my broker later in the day to tell me the SEC reversed the trades during that flash crash, including mine. So a few thousand dollars that by all rights should have been mine went back to the HF traders.
The little guy can't win.
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my open order got filled by HF traders due to a flash crash they caused in that stock.
Whether your broker told you that or not, I guarantee nobody has any idea whether it was HF traders or a trend-following human on the other side of that trade. That's kind of a main point of the exchange -- anonymous trading.
This is not to take away from the fact that your trade got reversed, which definitely does suck.
Mod parent down... (Score:3)
Re:Mod parent down... (Score:5, Informative)
Knight lost the money, there was no parachute.
You're right.. but how about some details?
http://www.businessweek.com/news/2012-08-09/knight-says-it-may-face-more-burdensome-costs-from-trade-error [businessweek.com]
Knight was saved from collapse on Aug. 6, when it received a $400 million cash infusion through the sale of convertible securities to a consortium of investors.
Getco LLC, Blackstone Group LP, brokerages Stifel Nicolaus & Co. and TD Ameritrade Holding Corp., as well as Stephens Inc. and Jefferies Group Inc. invested in the rescue funding for knight, according to the Jersey City, New Jersey-based company. The investment will give the firms a 73 percent stake in Knight once the shares are converted into common stock.
So there you go... they were forced to give away control of their company to a number of outside investors.
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No, some trades were reversed. They suffered, but not the full extent.
I keep laughing at my friends... (Score:4, Insightful)
Re:I keep laughing at my friends... (Score:5, Informative)
Liquidity isn't about time, it's about spread. Stock markets are double-auction systems, where you are free to bid and offer at any price you want. Trades only occur when someone offers a stock for less than someone else's bid price. The stock has a 'price,' and to buy stock you have to bid a little higher, and to sell you have to bid a little lower. The difference between the bid and offer price is the spread, and the spread represents an inherent transaction cost to most investors.
Now liquidity is just how easy it is to convert your stock into cash. There is always some liquidity, as long as you're willing to accept a bad deal. You offer to sell your stock cheaply enough, or buy high enough, and somebody will buy or sell. Of course, on blue chip stocks, the spread has always been pretty small, so it has never cost a lot to trade in those stocks. But in medium-cap and small-cap stocks, where HFTs have had the biggest impact, they've reduced spreads enormously.
Twenty years ago before the rise of HFT traders, you might had paid a market maker $0.50 / stock on the spread for a trade in a medium-cap stock. If you want to rebalance your investment portfolio annually, those kinds of transaction costs could wipe out your gains. It effectively priced individual investors out of the market, and if you wanted to save money you were forced into the hands of large institutional investors, who will happily charge you a 2% management fee for the pleasure of handling your money.
Today we take it for granted that most stocks have very small spreads, and you can make regular trades without seeing all your gains lost to transaction costs. HFTs have put the Serious Men in Suits market makers out of business, and have pushed the cost of trading down to the point where the individual can manage their own savings, without having to fork over most of their profit to other Serious Men in Suits.
So yeah, you may not like high frequency traders, but they're better than the old-boy networks of "specialists" and stockjobbers that they replaced.
Re:I keep laughing at my friends... (Score:5, Interesting)
Twenty years ago it was also much harder to match up buyers and sellers, and actual trades took a lot longer. It's hard to say how much of the decrease in spread is due to high frequency traders and how much is due to improved technology providing a more efficient, easier to access market.
Not that there seems to be anything particularly bad about encouraging people to buy long term investments.
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Why do you think transaction costs would go back up if we abolished HFT?
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The real issue with this though is that while they work well in time of low volatility they do not provide liquidity when its needed the most (Impact event's such as earnings, etc)
And why would they? Why would anyone stand in the way of a major move?
They also tend to step in front of legitimate trades to skim a bit off of the top
As in they place an order on the book just like anyone else. Also these are legitimate trades, if you are on the other side you'll be getting a better deal.
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HFT Traders take a percentage of a company w/o ever actually owning it.
Doesn't work that way. You don't magically own a portion of a company just because you trade in milliseconds instead of minutes. It's amazing the claims that are made about HFT.
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Knight Capital is not an HFT shop, they do not engage in HFT! Spend 30 seconds googling before you jump to conclusions.
Dead Code (Score:5, Interesting)
This is why mission critical systems should have a "No Dead Code" requirement.
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By Dead Code, you mean code that never (so far) executes?
That would also mean you'd never have any contingency code for "rocket has failed to propel" or other "shouldn't happen, but still" type situations.
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No, code that has no possible path to get to it.
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OK, but what could that have to do with the Knight situation?
If there's no possible path (as opposed to an unlikely path), it'll never be executed, and hence it could not be responsible for the $440 mil loss, or the Toyota "brake failures" or whatever.
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Re:As a Conservative (Score:4, Insightful)
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What he's likely saying is that, ideally, capital flows to those companies and endeavors "needing it" most, usually viewed in valuation, usually meaning paying customers want that companies products built and they are willing to buy.
Speaking of which, did you have an alternative?
Allocation of capital by central committee? That would be a totally "merit based system", right?
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"capital flows to those companies and endeavors 'needing it' most"
From each according to his ability, to each according to his need... no, wait, that's not right.
Capitalism is essentially a "wisdom of the crowd" approach to allocating resources. It seems to work pretty well, when properly regulated, but it definitely doesn't pay any attention to abstract concepts like "merit." Contrary to what the OP said, the stock market is the epitome of capitalism - a place where individuals with capital can allocate
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You can argue that the end result of ANY system is merit based. Centrally planned monarchy? The king, or whoever controls him, must have gained and retained that ability by some merit.
Capitalism, as a means of deciding what gets produced, isn't really a merit based system. Individuals will choose to invest in things for a wide variety of reasons. Some will succeed and others will fail. Warren Buffett might have gotten rich through intelligent investing, or he might have been in the right place at the r
Re:As a Conservative (Score:5, Insightful)
Yeah, with capitalism the birth lottery is often more important than merit.
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Copypasta from the definitive study of millionaires. "Millionaire Next Door" by Thomas J. Stanley and William D. Danko
Some Shocking Statistics about these Millionaires:
-The average taxable income for them is $131,000
-They live on less than 7 percent of their wealth
-Many of their occupations could be classified as dull-normal such as: welding contractor, auctioneer, mobile-home owner, paving contractor, coin and stamp dealer
-They invest on average nearly 20% of their household income
-Most of them are homeown
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How's that? Knight screwed up badly, and the mistake has cost them $400 million dollars. Sounds pretty merit-based to me.
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Very interesting thinking. You may also be interested in The Managerial Revolution, a book by James Burham, an early American Trotskyite, and later conservative.
In it, he posits (among other things) that the separation of ownership and control had become a strong part of American economic thought. Burham thought that the managers (CEOs, etc.) appointed by owners through boards would set themselves up as a privileged class, with loyalty more toward their own interests than those of the owners.
He also analyze
As a matter of financial history (Score:2)
Should know better. (Score:4, Funny)
Did nobody think to sound the alarm when the consoles started displaying... *BRAINZZZZ...* ?
They probably sent IT techs into the server room one at a time.
Reducing the risk of rogue algorithms? (Score:2)
"Once triggered on Aug. 1, the dormant system started multiplying stock trades by one thousand"
"High-speed programs that funnel orders to markets need software engineers who can write code in the programming language known as C++ and for a Linux operating system, he said in a phone interview"
Stock trading robots are destroying the markets (Score:5, Informative)
http://www.fool.com/investing/general/2012/08/10/the-terrifying-graphic-that-shows-stock-trading-r.aspx [fool.com]
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That is the most out-of-context thing I've ever seen on slashdot. You took the quote that the article was disagreeing with, and presented it as the article's thesis instead. For the curious, here's the final paragraph of the article linked:
Whether increased participation from HFTs is a good or bad thing is up for debate, as is whether steps need to be taken to limit the activity of HFTs. And that's a debate that needs to happen, but it needs to happen based on solid facts and a good understanding of what's really going on.
This particular graphic, however, was assigned meaning that was never actually there. To me, this suggests a high level of fear (whether warranted or not) of HFTs, a lack of understanding of what HFTs are doing, journalistic laziness, or, probably, a bit of all three.
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You should try citing articles that agree with your point rather than ones that pick your claim to pieces.
When prod-1 != prod (Score:5, Insightful)
This is what happens when the pre-production environment is not identical to the production environment. Got egg on my face (though no direct financial cost incurred) when the production environment had that 0.01 JRE increment that addressed the new-fangled daylight saving time, and the pre-production environment did not. It caused some very strange bugs due to the change in date handling, even though it wasn't anywhere close to spring forward time. (We developers had no access to the machine, so it took a while to figure out, too.)
And great man once said... (Score:2)
HFT adds liquidity? (Score:2)
HFT adds nothing, all these trades do is take from the muppets (clueless investors) and give to the huge financial houses. The muppets [nytimes.com] add wealth by going into perpetual debt in order to buy luxury goods on the high street. The money for which is 'loaned' by the self same financial houses. You're only worth as much debt as you can incur over your lifetime. Yes - they're is a metric for that too.
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sure it does. it switches liquidity from 2 minutes to 2ms! well, actually to two minutes but with a skimmer in the middle.
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You could take your comment and replace "HFT" with "brokerage" and everything you say would be true... and yet, we still need brokers.
HFT makes the market more accessible by minimizing the spread. HFT firms profit by taking some of the money that speculators used to make because of wild changes in the spread, but at the same time they reduce the risk the rest of us face when investing in smaller firms, which seems to be a good thing to me.