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.
Dead Code (Score:5, Interesting)
This is why mission critical systems should have a "No Dead Code" requirement.
Comment removed (Score:5, Interesting)
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.
Re:The NYSE shouldn't reverse trades. (Score:2, Interesting)
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 economics (maths laced with a tremendous number of assumptions) supersedes all the soft social sciences, and is actually the final word on sociopolitical arrangements and indeed human well-being.
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.
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.
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.
Re:The NYSE shouldn't reverse trades. (Score:2, Interesting)
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.