Algorithmic Trading Glitch Costs Firm $440 Million

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)."

Comments

Visual walkthrough and commentary of the mayhem

[recoiledsnake]

Here http://www.youtube.com/watch?v=dOO9XxH5Nyo&list=UU6NBj2q25QL4kN8tqwU9c-A&index=2&feature=plcp

Re:Visual walkthrough and commentary of the mayhem

[Anonymous Coward]

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:Visual walkthrough and commentary of the mayhem

[fuzzyfuzzyfungus]

This feature is by design.

Re:Visual walkthrough and commentary of the mayhem

[Anonymous Coward]

If being rich didn't grant you an advantage, what would be the point of trying to get rich? My main problem with some rich people is that they didn't get there honestly, by serving consumer desires and competing against other companies. Instead, many got there through government favors, artificial monopolies. (Hint: The answer isn't more government intervention i.e. more opportunities to play the politics game.)

Re:Visual walkthrough and commentary of the mayhem

[GameboyRMH]

Good point, I can't imagine what the benefits of having huge amounts of money would be without an accompanying unfair advantage in the marketplace.

Re:Visual walkthrough and commentary of the mayhem

[Lennie]

If I remember correctly, some say the financial crisis was also initiated by a similair algorithmic trading mortgages.

Re:Visual walkthrough and commentary of the mayhem

[0123456]

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.

Like the rest of the stock market, you mean?

Re:Visual walkthrough and commentary of the mayhem

[Anonymous Coward]

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.

Re:Visual walkthrough and commentary of the mayhem

[Anonymous Coward]

No it wasn't.

Re:Visual walkthrough and commentary of the mayhem

[alexander_686]

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.

Re:Visual walkthrough and commentary of the mayhem

[Anonymous Coward]

+1 Also, I am all in favor of stricter HFT regulation, but bonds are almost always traded via broker-dealers, not exchanges.

However, MBS, CDO, or any ABS along with CDS did not a crisis make. These tools put the banks in a worse position than they would have otherwise been by increasing their exposure, thus necessitating a bailout. But the ensuing recession was caused by the underlying asset, consumer debt. The financial crisis was merely a case of cheap money, and hyper leveraging. There was a lot of irresponsibility and greed on Wall Street, but the bubble that popped and set the rest in motion (and also hurt individual Americans most) was the housing bubble...and that was created by liberal fiscal policies during the Clinton administration. I don't fault him for it however, I fault Greenspan and the two morons who were later left in charge of cleaning up, Dodd and Frank.

Re:Visual walkthrough and commentary of the mayhem

[mhajicek]

Appearance?

Re:Visual walkthrough and commentary of the mayhem

[Anonymous Coward]

Something tells me their not using XML to load those tapes.

Re:Visual walkthrough and commentary of the mayhem

[Anonymous Coward]

What's unfair about someone that has worked all his life, invested wisely, saved, etc, having an advantage over someone that just started in life?

Re:Visual walkthrough and commentary of the mayhem

[Imrik]

Now compare their children.

Re:Visual walkthrough and commentary of the mayhem

[HeckRuler]

You're reading that wrong. It's not just "nice" being rich, the "advantage" that the previous coward was talking about is a competitive advantage. They're not playing by the same rules you and I are. It's a bias in the game that favors them. It's systematic cheating. I agree with you that there are rich scumbags who didn't get there honestly. But regardless of how they got rich, the rich aren't (generally) making their income honestly. And that's at our expense. All that money comes from somewhere. The financial industry does not generate wealth. Monopolies, oligarchies, back room deals, and "take-backs" on stock exchanges, these are failures of the free market. They're playing the big business game, and you and I aren't allowed in.
(Unless we all team up to form an even bigger and more powerful zoid that forces them to play nice)

Re:Visual walkthrough and commentary of the mayhem

[Anonymous Coward]

What about them? Are you saying that if I work hard all my life I shouldn't be able to leave what I have to those that I care about the most? I really don't understand what your complaint is.

Re:Visual walkthrough and commentary of the mayhem

[Anonymous Coward]

thanks for this ^^^

Re:Visual walkthrough and commentary of the mayhem

[Anonymous Coward]

To paraphrase:
"What's unfair about someone that has never worked in their life, inherited money from their parents, etc, having an advantage over someone that has to work two jobs just to feed their family?"

Re:Visual walkthrough and commentary of the mayhem

[Anonymous Coward]

To respond:

Life isn't inherently fair - who ever gave you the naive impression that it was? Should we also start breaking every infant's legs at birth, because some people are born with bad knees and hips, and other people are fortunate enough to be born with the bone structure and genetics of an Olympic athlete?

As far as your whining about inherited fortunes, think on this for a bit:

"Only the man who does not need it, is fit to inherit wealth - the man who would make his own fortune no matter where he started. If an heir is equal to his money, it serves him; if not, it destroys him. But you look on and you cry that money corrupted him. Did it? Or did he corrupt his money? Do not envy a worthless heir; his wealth is not yours, and you would have done no better with it. Do not think that it should have been distributed among you; loading the world with fifty parasites instead of one, would not bring back the dead virtue which was the fortune. Money is a living power that dies without its root. Money will not serve the mind that cannot match it. Is this the reason why you call it evil?"

Re:Visual walkthrough and commentary of the mayhem

[tolkienfan]

Without full downside risk?
1.The cancelled trades were executed way off of any reasonable price.
2. They lost $440,000,000
3. Every study I've read had concluded that HFT benefits the market in general and regular investors in particular. HFT helps correct for human irrationality and helps keep markets efficient and liquid. This LOWERS the cost to investors.

Re:Visual walkthrough and commentary of the mayhem

[tolkienfan]

None of that applies to HFT

Re:Visual walkthrough and commentary of the mayhem

[tolkienfan]

Another factor was that the underlying assumption that changes in the values of the various CDOs were uncorrelated was completely incorrect. As a result portfolios that were considered risk-neutral were actually time bombs.

Re:Visual walkthrough and commentary of the mayhem

[Afecks]

But regardless of how they got rich, the rich aren't (generally) making their income honestly.

If they aren't committing fraud (illegal) or using the government (artificial monopolies) then they are engaging in voluntary exchanges i.e. free trade. If I trade your pen for my watch and you agree, then it must be the case that I value your pen more than my watch and you value my watch more than your pen. After the exchange, we both end up with something we find more valuable. We both are better off. That's what I advocate. The alternative is one of us using violence to force the other to commit to an involuntary exchange. That's uncivilized barbarism as far as I'm concerned.

Monopolies

Artificial monopolies can only exist through violent enforcement (typically government). Otherwise, monopolies aren't necessarily a bad thing. It just means that there's only a single seller.

If everyone buys Nike shoes because nobody else can provide the same quality at a competitive price and all other shoemakers go out of business, how is that bad? Even once the other shoemakers go out of business, Nike isn't going to be able to start charging $10,000 a pair. Whenever the price gets high enough, other firms will be tempted to enter the market. The higher the price goes, the more tempting it is. Nike wants to make profits. It's likely that they're going to keep their prices low enough to avoid losing market share. The mere possibility of competition will keep their prices in check.

You'll probably claim that they will just lower their prices to the point of losing money long enough to drive others out of business but historically that's highly unlikely and has never resulted in a stable abusive monopoly. The reason being that there are several strategies to combat it. You could start stockpiling Nike's shoes, wait until they are tired of hemorrhaging cash and then sell them at just above what they cost you to make a profit (but still at or below what Nike needs to make a profit). You could also point out to their customers that Nike is only selling low so they can jack up prices later. Look at the widespread outrage at Chick-Fil-A in the US, just from the actions of one executive. You don't think they'd boycott a business that's trying to systematically fuck them over monetarily? There are many other possible defenses that I won't go into. Which is why, as I said, it's virtually unheard of.

oligarchies, back room deals

The same problems apply as previously mentioned and then some. These same cartels are trying to fuck each other over just as fast and hard as they are trying to fuck over everyone else. Let's ignore the previous issues (though they still apply and therefore this is somewhat irrelevant) and pretend that somehow Nike and Adidas have run everyone else out of town. They still have to deal with each other. They have artificially high profits but each one can make more money by secretly lowering prices thereby grabbing more market share through those very same "back room deals". The same hunger for profits that builds cartels makes them unstable and causes their inevitable destruction. The only long-term stable collusion that gets to outrageous levels is between governments and businesses.

"take-backs" on stock exchanges

I'm not familiar with that term. However, I will say that if you agree to some terms and conditions then you must follow through with them. Otherwise, it's breach of contract (tortious) or fraud (illegal). If you'll elaborate more then I'll address that too but I don't have hope that it will stand up to scrutiny.

If you really care about challenging your beliefs then I suggest you watch Walter Block's Introduction to Libertarianism on YouTube, read David Friedman's Machinery of Freedom and if still hungry for more, read The Market for Liberty by Linda and Morris Tannehill. Everything you've said so far has been refuted a thousand times over. In itself that is no big deal. After all, I don't blame you for being ignorant (not an insult, we are all ignorant of things, including me) but I do think it's irresponsible to have such a vociferous opinion while choosing to remain in such a state.

Re:Visual walkthrough and commentary of the mayhem

[couchslug]

"The world economy takes on an appearance of a club where the superrich bilk regular imvestors and tilt the playing field in their own favor."

Fixed it for you.

Re:Visual walkthrough and commentary of the mayhem

[Anonymous Coward]

So, I can spend my life savings on hookers and blow but give any of that money to my children and "ZOMG UNFAIR"?

Re:Visual walkthrough and commentary of the mayhem

[tolkienfan]

Very well said.

Re:Visual walkthrough and commentary of the mayhem

[cheesybagel]

It's think smart not work hard. If you think you can get rich simply by working hard you are sorely mistaken.

Re:Visual walkthrough and commentary of the mayhem

[Anonymous Coward]

"But regardless of how they got rich, the rich aren't (generally) making their income honestly."

I guess once you make one stupid, unsupported, and untrue statement, you can arrive at any conclusion you want.

Re:Visual walkthrough and commentary of the mayhem

[justforgetme]

What? You don't need money and connections in order to run an HFT operation?

Re:Visual walkthrough and commentary of the mayhem

[mcgrew]

What's unfair about someone that has worked all his life, invested wisely, saved, etc

That's not how one gets rich. Those things are usually necessary to become rich, but the biggest factor is dumb luck. The "wise investor" can be wiped out as easily as the foolish investor, and the fool can get lucky and pick a winner. And you have to have capital before you can invest it.

My late uncle became rich after WWII making medical prosthetics. Had he not been lucky enough to be born with high intelligence, creativity, eye-hand coordination; had he not been wounded abord ship, and had he not met his future partner (a born salesman) in the hospital, he would likely not have gotten rich. Having his wife come from a rich family didn't hurt, either. Nobody gets rich without knowing the right people, unless they win the lottery or something.

Re:Visual walkthrough and commentary of the mayhem

[HeckRuler]

If they aren't committing fraud (illegal) or using the government (artificial monopolies) then they are engaging in voluntary exchanges i.e. free trade.

Good ol' fashioned regular monopolies don't function inside of the free market. They OWN the market. The free market is dependent on rational well-informed people who can take their business elsewhere. The free market requires competition. Without it, there is no free market.

[free trade] That's what I advocate.

Me too. The free market system works fantastically well. Capitalism works bitches! But only when there's a free market, competition, rational and informed buyers/sellers. And it's a sliding scale, where the market is more free, it works better and where it's less free it doesn't work as well. It's not an all-or-nothing thing. Where there are man-made monopolies, natural monopolies, or things we can't entrust to the free market, then we need oversight, regulation, or flat-out government control. Or should it be every individual's Libertarian-wet-dream RIGHT to go purchase and open-carry a nuke?

The alternative is one of us using violence to force

No it isn't. That's your sad strawman you pulled from behind the couch. The alternative I'm suggesting is to make it illegal, like fraud, to have an unfair advantage in a market. That's not violence. It's a rule we all agree to play under. If a company breaks the rules, it gets fined. If it REALLY screws the system, it gets broken up into smaller corporations. Cry me a river. Is paying a speeding ticket the same as jack-boot thugs giving you a curb-stomp?
But having an unfair competitive advantage should be illegal. Like when there's a monopoly. Oh wait, that's already because we've been through this before. And now it looks like we need additional regulation to keep people from cheating the system by calling a mulligan just because they lost of lot of money and they're powerful.

Even once the other shoemakers go out of business, Nike isn't going to be able to start charging $10,000 a pair. Whenever the price gets high enough, other firms will be tempted to enter the market.

Yawn, Barrier to Entry. Man, have you even taken a GLANCE up from your Ayn Rand novels to take a look at economics?

but historically that's highly unlikely and has never resulted in a stable abusive monopoly.

Standard Oil drove a lot of people out of business with it. It was only an "unstable" strategy because politicians threatened to break them up, which they did. Eventually.

You don't think they'd boycott a business that's trying to systematically fuck them over monetarily?"

Apple. The masses are fickle and not entirely rational.

"take-backs" on stock exchanges

I'm not familiar with that term. However, I will say that if you agree to some terms and conditions then you must follow through with them. Otherwise, it's breach of contract (tortious) or fraud (illegal). If you'll elaborate more then I'll address that too but I don't have hope that it will stand up to scrutiny.

Read the article dude. And it's actually the main thing that I was rallying against. Read the ancestor anonymous post that I was defending. It'd be nice if you were aware of the current discussion.

Re:Visual walkthrough and commentary of the mayhem

[Grumbleduke]

Because there's a threshold at which you have enough money to be able to make more money without doing anything "productive". And once a person passes that threshold, if they're allowed to bequeath their money (without a healthy dose of inheritance tax), their heirs are put in the same position. So you end up with chunks of society who have ever-increasing proportions of the society's wealth, without contributing anything (substantial) back.

Eventually, you get to this point where the "advantage" that person has (due to the luck, as much as anything else) is so great that the gap becomes (virtually) insurmountable and then you're facing all sorts of social, economic, political and cultural problems that it will take quite a bit of effort to fix.

Re:Visual walkthrough and commentary of the mayhem

[Anonymous Coward]

The free market requires competition.

The possibility of competition is enough, as I've already explained.

Or should it be every individual's Libertarian-wet-dream RIGHT to go purchase and open-carry a nuke?

By all means, let's jump to the extremes and pretend that what kind of logic applies to weapons of mass destruction applies everywhere else. Let's also ignore the fact that buying nukes at Walmart isn't even in the realm of reasonable possibilities.

The alternative I'm suggesting is to make it illegal, like fraud, to have an unfair advantage in a market.

How do you think that's enforced? Angry letters? It's exactly what I said, "using violence".

Is paying a speeding ticket the same as jack-boot thugs giving you a curb-stomp?

Is a deregulated free market the same as open-carry nukes? I wondered why you can see how absurd such analogies are only when it suites you.

Cry me a river.

Stay classy.

Yawn, Barrier to Entry [wikipedia.org]. Man, have you even taken a GLANCE up from your Ayn Rand novels to take a look at economics?

I'm not a Randroid. Her prose is interesting although too self-righteous for my tastes and by no means a masterpiece. Her philosophy is drivel. Back on topic, what kind of barrier to entry do you think exists in making shoes? What you're doing is nothing more than hand waving. There is a barrier to entry in all things. It costs money to set up a simple lemonade stand. However, that barrier still represents an upper bound to the prices you can set. If you set your prices too high then it becomes possible for me to enter the market. If people are buying lemonade for $1,000 a glass a $5 barrier to entry is nothing, even if I'm broke I can get someone to loan me the $5 for a cut of the profits or interest. Where's your analysis of this fact? Nowhere to be seen.

Standard Oil [wikipedia.org] drove a lot of people out of business with it. It was only an "unstable" strategy because politicians threatened to break them up, which they did. Eventually.

Hilarious! Refined oil prices DROPPED by over 500% in its first 30 years of business while it was trying its hand at predatory pricing. After that time, it stopped trying to undercut the competition and its market share dropped to around 65% when it was finally broken up a decade later. Even then, it still had around 150 competitors at that time. Your example is the exact opposite of what you're arguing. It's an example of how I'm exactly right. You can drive competition out of business with low prices but consumers benefit from those low prices. When you stop using predatory pricing, more firms compete against you and by raising your prices you lose market share. Again, consumers benefit. That's exactly what I'm saying. Thanks for making my point for me.

Apple. The masses are fickle and not entirely rational.

Apple uses artificial monopoly tactics e.g. patents, copyright, etc to stifle competition. Also, there's nothing rational about personal preferences. They are based on emotions, taste, not logic.

Read the article dude. And it's actually the main thing that I was rallying against. Read the ancestor anonymous post that I was defending. It'd be nice if you were aware of the current discussion.

I already responded to that but was confused by your bizarre term "take-backs" which isn't something I've heard since grade school. If you play someone's game and you agree to the rules, follow them or get out. It'd be nice if actually respond to what I've said instead of trying to insult me.

Re:Visual walkthrough and commentary of the mayhem

[HeckRuler]

Forget to log in or something?

Is a deregulated free market the same as open-carry nukes?

When the market is nuclear weaponry? YES. Yes it is. The point I was going for is that IN SOME CASES, regulation and government control is required. Some markets cannot be free, some markets we should now allow to be free. Slavery, for example, is simply wrong and shall be illegal. But I'm pretty sure you and I all agree on that. Wouldn't it be nice if we focused on our common ground rather than leaping for each others throats?

Laws

How do you think that's enforced? Angry letters?

Yeah, mostly. And fines. Especially when it comes to corporations breaking industry regulation. I'm telling you that the SEC doesn't drop from helicopters, burst through doors, and mow down brokers in a hail of gunfire. At worst they serve arrest warrants to white collar criminals who come along, get process, get a lawyer, lose some money, and get on with their lives. Now, boil it down, on some metaphorical level, sure, any sort of authority can be said to be derived from force. Or violence if you will. But we don't say that meter maids punish people through the use of violence. Come on, they just write you a ticket. An "angry letter" if you will.

However, that barrier still represents an upper bound to the prices you can set. If you set your prices too high then it becomes possible for me to enter the market. If people are buying lemonade for $1,000 a glass a $5 barrier to entry is nothing, even if I'm broke I can get someone to loan me the $5 for a cut of the profits or interest.

And this is where you miss the lesson. When you're broke you usually CAN'T get a loan to start up a shoe factory, or a cable company, or a heavy industries manufacturing plant. And, if you CAN, because you've got rich parents or something, now you are burdened with a massive amount of debt. All the formerly monopolistic company has to do is sell their goods at a reasonable rate and they can undercut you. Because they don't have that massive debt. There's also customer lock in, right-of-way with power lines/roads/airspace, contracts that last for years, and probably dozens of other ways to keep out competition. Things that people with business degrees dream up at night. And that's the legal stuff. But we all know there are bad businessmen out there.
But you're right, some markets like lemonade stands have a low barrier to entry. And look, we don't have any lemonade monopolies squeezing out the competition. For other markets, like heavy manufacturing, power generation, telecommunications, finances, oil, you know "big business", people like you and I have absolutely zero hope of breaking into that market. The barrier to entry is simply too high. Even large corporations can't break into those markets. The cost and risk is simply too great for any sane CEO to try.

Oh, don't get me wrong. Standard Oil most certainly deserved to get to the top. They simply had a better way of doing things, and the consumer prospered for it. But at the end they were abusing their position (come on, read it). The reason their market share was down was because oil fields were booming west of the Mississippi. If they weren't chopped up, they would have eaten the competition. This is an example of the government fixing a verifiable problem that was about to become an even bigger problem. Of course, there are plenty of other examples. Take your pick".

Yeah, "take-backs" was supposed to sound childish. Suitable for the spoiled little children that are running around on wall street playing games with our economy. It's good that you noticed that.

Re:Visual walkthrough and commentary of the mayhem

[Anonymous Coward]

Yeah, mostly. And fines.

What happens when those angry letters and fines aren't paid? Somewhere in the back of your mind you must understand that all laws are ultimately threats of violence.

When you're broke you usually CAN'T get a loan to start up a shoe factory, or a cable company, or a heavy industries manufacturing plant.

Who exactly is talking about going from being a hobo on the streets to getting a loan for a shoe factory? That's not how it works. You start small and grow from there. Look at McDonald's. They didn't start out as a franchise. Look at Walmart. There are thousands of examples and you can muster a handful of counterexamples. Have you never heard of microloans by the way?

If they weren't chopped up, they would have eaten the competition.

The evidence doesn't support that. They were already top dog yet couldn't prevent the other 150 competitors but somehow could pull it off once they started losing ground? Again, one example out of many to the contrary.

This will be my last response to you as I don't see this going anywhere. Thanks for discussion though.

Re:Visual walkthrough and commentary of the mayhem

[Vryl]

1. Queue all orders
2. Delay. 1 second? 2 seconds? Even maybe 5 seconds.
3. Randomise the queue
4. Execute all orders
5. Goto 1

Should stop this kind of bullshit.

Re:Visual walkthrough and commentary of the mayhem

[HeckRuler]

What happens when those angry letters and fines aren't paid?

Same thing as when you break a contract. Essentially when you live in a society, you have a contract to not break the rules and be an A-hole. A "social contract" if you will.
Yeah, yeah, metaphorical violence, got it.

Look at McDonald's. They didn't start out as a franchise.

HAHA OH WOW. So you know that the people that invented the whole "fast food" idea, the founders of macdonalds got royally screwed by a slimy rat-faced businessman right? They sold the company and rights to him with a hand-shake and verbal agreement to get a 2% royalty from the franchises. This is NOT a story you want to whip out when you want to argue in favor of big business and the free market.

Who exactly is talking about going from being a hobo on the streets to getting a loan

YOU:

even if I'm broke I can get someone to loan me

They were already top dog yet couldn't prevent the other 150 competitors but somehow could pull it off once they started losing ground?

Did you read my post? They were top dog, in their region. They didn't lose ground, new ground was developed. The market increased in size. Now, if only we had an example of the big dog eating all the little dogs.

Thanks for discussion though.

No problem, the back and forth is good for others that might be reading. Hell, and someone out there modded me up DAYS after the original post.
Libertarians have a pretty idealistic view of how economics and business work. Ideally, yeah everything would function like that and we really wouldn't need a government or a military. Sadly, the real world doesn't work that way and by and far the whole game is rigged to help those who have already won. You can't stick your head in the sand and pretend that the poor street urchin is playing the same game as CEO of Knight Capital Group who can nix a bunch of trades because he's buddy buddy with the guy who runs the stock exchange.

Re:Visual walkthrough and commentary of the mayhem

[HeckRuler]

The free market requires competition.

The possibility of competition is enough, as I've already explained.

I want to come back to this, just to hammer something home which I think libertarians need a remedial lesson on. I was going to say that, no you're wrong, you not only need actual competition, you need actual competition that actually competes. Oligarchies don't count. But that got me thinking.

The amount of competition is a sliding scale. It's not all or nothing, and it slides all the way down into values of "possible competition", "improbable competition", and "wisp of the idea of competition".
No market is totally free, but it's a nice ideal to strive for. Likewise, no market has total competition, but it's a good thing for society to strive for. It's a downright kick in the pants for anyone trying to make a buck in the market, but I digress.
If you have a total monopoly on a given vital resource, with no hope of anyone ever prying your cold dead hands from it, you effectively have achieved world domination. If the resource is less than vital, well, it's up to you to price the thing however you can attract the most money.
If you're in a market saturated with competition, "total competition" if you will, everyone is willing, able, and actively trying to do the job you're trying to making a living at. You are running at cost, or as near cost as you can survive on. And the bum under the bridge who eats what he can find is trying to undercut you. For the buyer, and society at large, this is ideal.

The less competition a market has, the worse the market works for society. The more competition a market has, the better it is for society. In the USA, we have barred total monopolies as illegal. The government, and by proxy all of us, are the fallback competition if there isn't any other. We will cut you up and make you compete with yourself if it comes to that. We've also removed the possibility of total competition. If you can't even subsist in a market, you can fall back on the safety net that is welfare.
And I want to repeat that this value slides all over the place. A market where there's only one supplier, a monopoly, can still have variable amounts of potential competition. The threat of competition is kinda sorta like competition. A market with two competitors going for each others throats can be a lot more competitive than 5 companies that all follow each others lead, or 50 companies that collude together in a back room (or openly as an association).
And it's not just one variable. A threat of future competition is different than than straight immediate competition. A market it takes 5 years to break into is different then one where anyone can drop some cash and step into. A market tied to customer loyalty has complicated psychological relationships to competition. A market that has historically had competition will behave differently. The customer's expectations will continue on with inertia. In short, it's complicated. It's nowhere NEAR as simple as "free trade = mutually beneficial exchange of goods, so let's deregulate". You can't ignore the market. You can't ignore the competition. And you can't ignore the need for some regulation in some markets.

So a free market requires competition. Some markets only have the threat of competition, and those markets suck (for society). The people in charge of establishing the system in which these markets function (our government and society at large) need to strive for a system which promotes more competition, and more meaningful competition. Where there is a lack of competition, where people simply can't compete, the government needs to establish regulation to keep the market from becoming abusive.

TFA

[Anonymous Coward]

For those not interested in going through all of the links just to find the one that links to the relevant article:

http://www.forbes.com/sites/steveschaefer/2012/08/02/knight-capital-trading-disaster-carries-440-million-price-tag/

Defend flash trading?

[Kelbear]

A common defense of flash-trading is that it provides market liquidity in that it provides counterparties to the desired transactions of the rest of the market.

But I've yet to see someone discuss how the added-value of millisecond liquidity is substantially superior to having exchanges post transactions in 1-sec. intervals to discourage millisecond arbitrage during which no new events have occured and no new market analysis has taken place, only speculation and playing the system against proper investors? Can someone illuminate me on this point?

Re:Defend flash trading?

[turkeyfeathers]

Millisecond liquidity is substantially superior to having exchanges post transactions in 1-sec intervals because it allows Goldman Sachs to make more money... duh.

Re:Defend flash trading?

[Anonymous Coward]

It provides more liquidity for campaign contributions, playing the system against proper investors.

Re:Defend flash trading?

[Genda]

What part of wealthy, powerful people with vast computing power screwing the general public do you not understand?

Re:Defend flash trading?

[Anubis IV]

Can someone illuminate me on this point?

No, but I'm sure we can find plenty of "experts" on Wall Street willing to call you ignorant and ill-informed while suggesting that we should dismiss silly questions like yours. That they're experts from the financial industry seems to have the unfortunate effect of lending them credibility in the eyes of most decision-makers.

Re:Defend flash trading?

[Anonymous Coward]

A common defense of flash-trading is that it provides market liquidity in that it provides counterparties to the desired transactions of the rest of the market.

But I've yet to see someone discuss how the added-value of millisecond liquidity is substantially superior to having exchanges post transactions in 1-sec. intervals to discourage millisecond arbitrage during which no new events have occured and no new market analysis has taken place, only speculation and playing the system against proper investors? Can someone illuminate me on this point?

How is 1-sec any better than milliseond liquidity? I doubt any no new events have occured and no new market analysis has happened within 1-sec.

It took me a long time to understand Liquidity. Google search Liquidity and all you get is basic finance 101. Here's what I figured out, Liquidity means being able to get your money out of an investment before anyone else.

Re:Defend flash trading?

[Kelbear]

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.

Re:Defend flash trading?

[jgtg32a]

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.

Re:Defend flash trading?

[ThatsMyNick]

My only question is why set it to 1 second intervals, and not say 1 hour or day or month intervals. What difference does it make?
 
My understanding is that it takes time to arrive at price discovery. If you prolong-ate the time interval, it takes more to arrive at the actual price the forces determine.
 
Besides I dont think 1 second intervals will stop these algorithms. It will only give the algorithms more time to reverse engineer trades and intentions, and build strategies.

Re:Defend flash trading?

[GameboyRMH]

1 second is a human-relevant timescale that removes the inherent advantage that the machines have, this is a great improvement over the current situation.

Re:Defend flash trading?

[Stirling Newberry]

It destabilizes prices, and that is what traders trade.

Re:Defend flash trading?

[xs650]

A common defense of flash-trading is that it provides market liquidity in that it provides counterparties to the desired transactions of the rest of the market.

If fleas could talk they would tell us how they benefit dogs.

But I've yet to see someone discuss how the added-value of millisecond liquidity is substantially superior to having exchanges post transactions in 1-sec. intervals to discourage millisecond arbitrage during which no new events have occured and no new market analysis has taken place, only speculation and playing the system against proper investors? Can someone illuminate me on this point?

I would go for a longer period that 1 second, although 1 second would be an improvement.

Re:Defend flash trading?

[cp5i6]

These are actually dark pools and nothing at all related to how you and me trade.

These are transactions that go between market makers. Big boys on the street.

You create an external market place by allowing the free flow of securities behind the scenes. You don't actually have the ability to see what's going on in the background. What it insures is that when the retail market looks at it, they can be sure that they are transacting on the "real" price as determined by the market.

So to your interval question, it's about the price.
If you transact only once a month, surely the price has moved somewhere in between. You buy apple at 600 at the beginning of the month and you want to sell it now, what price do you get quoted? The 600 that was still there a month ago, or do you wait till the end of the month and see where it lands.

Re:Defend flash trading?

[Anonymous Coward]

It probably does. Without the ability to attempt to game the system like this, none of these trades would ever be made, which would overall reduce liquidity (which obviously would also reduce the money the exchange gets to make, which is why the exchanges are never going to change it unless forced to). Whether the reduced liquidity would be significant in any meaningful sense is probably hard to quantify - but I doubt it.

In my opinion, introducing a random (and it would have to be truly random, like based on isotope decay or something, or these guys would figure out how to predict the random numbers and profit off that) delay on any given trade of between 30-60 seconds would be a good start.

Re:Defend flash trading?

[NatasRevol]

If you prolong-ate the time interval, it takes more to arrive at the actual price the forces determine.

Why? It actually gives you more time to consider what a fair price is.

It's the total time required to come to a fair price that's the same. Not the number of time intervals.

Re:Defend flash trading?

[cp5i6]

This is also where Knight's algorithm potentially screwed up.

usually firms will put in limit orders. ie I believe it's this so therefore don't go above or below that target to transact

Also what you are missing is that NYSE just "matches" trades. 1 second "guessing" ignores that fact that no matter what you guess, if there is no match, there is no trade. And since not all the market makers enter their prices at the same time, not everyone waits around at the same time.

here's an exaggerated example
Take enron when they released their financial misreporting scandal.
Imagine if every one had to wait 1 hour before prices get updated and transacted.
The stock was at 72$
Everyone in the world just puts in a short @ 72$ because we ALL know what's goign to happen to this stock
At the end of the hour, every one and their extended relatives has shorted Enron @ 72$.
Now, as the exchange, what gets executed? Chances are, nothing. All those buyers on the other side already knew that 72$ is a terrible buy and would have all pulled prices. You now have 0 liquidity.

Re:Defend flash trading?

[skids]

I wonder if the spedning on this campaign might go high enough to provide significant stimulus to the GDP and jobless numbers. In 2008 total political spending was several billions of dollars -- now we have Citizens United and PACs on steroids. It would be funny if the rommunists undercut themselves.

Re:Defend flash trading?

[gl4ss]

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.

Re:Defend flash trading?

[Nicolai Haehnle]

That's an interesting line of thought, though I would ask just how many cycles you would need to find the right price. The market may see some over- and undershoots in the valuation, but it seems like no more than a handful cycles would be needed. Then each cycle might require several "ticks" to work its way. In any case, even if the length of a tick were a minute, it should take much less than a day for the price to settle.

Re:Defend flash trading?

[Anonymous Coward]

That seems to work fine to me. People holding stock worth NOTHING (Enron's) can't sell it. What's the problem? All the ms trading lets happen is for GS and other big investors to unload before the rest of the market realizes that Enron's stock is worthless. It is taking advantage of information lag.

Re:Defend flash trading?

[Anonymous Coward]

Still not seeing why this is a bad thing.

Perhaps it's time to start punishing investors for buying in to fraudulent companies like Enron. Perhaps it would encourage some oversight and scrutiny if investors were actually on the hook for the actions of the companies they sink money in to.

I think the world would have been a better place if everyone who'd ever spent money on Enron lost every cent when the company imploded.

Re:Defend flash trading?

[Anonymous Coward]

Millisecond liquidity is substantially superior to having exchanges post transactions in 1-sec intervals because it allows Goldman Sachs to make more money... duh.

And me.

(And I'm not an employee of Goldman Sachs or any other bank.)

Re:Defend flash trading?

[GameboyRMH]

It's both. I think 10secs would be a good place to start for an interval.

Re:Defend flash trading?

[cp5i6]

Really?

What if you were an IT guy who worked at Enron and you happen to be paid in Enron stock?

What if you were working at face book and they paid you in facebook stock for a lower salary and it turns out Facebook was basically committing fraud by having bots click on their paid adverts links. Facebook stock then crashes and you can't sell out of what you have.

Perhaps you hide all your money under your mattress, good luck keeping up with inflation.

Re:Defend flash trading?

[hairyfeet]

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:Defend flash trading?

[Rob Y.]

Let 'em trade as fast as they can, but add a small transaction fee per share to weed out the traders that are gambling on the second-to-second fluctuations. Problem solved.

Re:Defend flash trading?

[cp5i6]

In your case, the small investor gets back 0.

In current market scenario, the small investor still has the ability to sell and recover a small portion of his investment.

I think the small investor feels the pain more when he gets back 0 compared with a big firm.

Re:Defend flash trading?

[Anonymous Coward]

Has anyone noticed that this "high frequency mistake" went on for something like 45 minutes? If it was only trading every few seconds, it still would have happend for 45 mins...

Re:Defend flash trading?

[Anonymous Coward]

You do realize that there are already transactions fees per trade. That's called a commission

Re:Defend flash trading?

[turkeyfeathers]

That proposal would be acceptable to all parties, provided you add a clause that rebates the small transaction fee to large players like Goldman Sachs who exceed a certain number of small transactions per day.

Re:Defend flash trading?

[bobbied]

>

But I've yet to see someone discuss how the added-value of millisecond liquidity is substantially superior to having exchanges post transactions in 1-sec. intervals to discourage millisecond arbitrage during which no new events have occured and no new market analysis has taken place

I don't think it matters what interval they stack and execute trades. If the exchange decides to slow the pace of trading, they run the risk of being usurped by some other company who decides to build their own, faster exchange. There is nothing really to stop the big traders from setting up a back channel trading route with each other. What might work to discourage the automated trading is to randomize the trading cycles so nobody knows when the stacked orders in the queue get processed.

Hmmmm.... I see a business opportunity here.

Re:Defend flash trading?

[Anonymous Coward]

Evil banksters damn it, its a conspiracy. All you OWNS losers get out the tinfoil hats ( sorry that's all of slash dolt). Roll out your idiot theories now, you sound worse than people wishing anyone who eats chicken should get cancer. Come on bitches. This site is free speech for the dumb.

Re:Defend flash trading?

[sourcerror]

That would defeat the whole purpose of this fee.

Re:Defend flash trading?

[timeOday]

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.

Is that bad? (Not a rhetorical question). The shift away from unfunded future liabilities like pensions and social security towards savings/investment plans like 401k's continues so this will only accelerate. Some people think it would be a good idea to replace Social Security with investment plans, in which case the market would be loaded up with decades of GDP (assuming we ever actually got far enough ahead of ourselves to implement the plan, such that most people had huge 401k's). Could that ever work?

Re:Defend flash trading?

[turkeyfeathers]

That was the whole purpose of the amending clause their lobbyists would insert in the draft legislation... don't you know how democracy works?

Re:Defend flash trading?

[yuriyg]

how the added-value of millisecond liquidity is substantially superior to having exchanges post transactions in 1-sec.

"640K should be enough for everybody"

Re:Defend flash trading?

[aaarrrgggh]

My take is that the equilibrium and dampening required takes minutes to achieve at a minimum; the HFT algorithms need to minimize risk to make a profit on gains of less than 1% per transaction. This gives a disincentive to enter trades with high volatility in direction terms, and focus on variability between exchanges. Their algorithms need to be based on the first or second derrivative of price from what i can surmise. Check out this graphic of what happened after Apple's last earnings release.

Compare that arbitrage to a 10-day window on AAPL, and the risks associated with hasty decisions should be abundantly clear...

Re:Defend flash trading?

[michelcolman]

Well, after one hour, the bid will be $50 and the ask will be $72. So in the next hour, sell orders will start coming in around $50. Which is a fairer price than $72. Eventually, the market will find a price and orders will get executed.

Of course an hour is an exaggerated example, but milliseconds is crazy.

Re:Defend flash trading?

[EllisDees]

Make it a tax instead of a fee, and then you're talking.

Re:Defend flash trading?

[cp5i6]

acutally no,

after an hour when that info has desiminated, there would be a bid of 0$
and the ask would probably be 1$

In an efficient market where news is suppose to hit the fans at the same time, you'd basically have shut down liquidity for that entire period.

If trading in miliseconds you have smaller "steps" as people will let you "tick" the price all the way down to 0.

Re:Defend flash trading?

[michelcolman]

"All the way down to 0" reminds me of the movie "Idiocracy", where Brawndo stock dropped to zero when the news came out about not using it to water crops anymore. I always thought it would be hilarious to have a stock actually trading at zero.

But anyway, I think there will always be plenty of people wanting to buy the stock at some reasonable price. If anything, there will be quite a few long term limit orders in the system so at least those will get executed. Your 0/1 example seems very unrealistic to me.

Re:Defend flash trading?

[delt0r]

Don't forget tricks like stuffing, and doing mass orders and cancels at the same time and stuff like that....

Re:Defend flash trading?

[metrometro]

Make it a tax instead of a fee, and then you're talking.

http://en.wikipedia.org/wiki/Tobin_tax

Re:Defend flash trading?

[cp5i6]

let me know what Enron trades at right now if you think my 0/1 example is unrealistic.

how about worldcom? let me know what the price of those are.

Btw if you still wish to buy Enron stock at a reasonable price, let me know =)

Re:Defend flash trading?

[hairyfeet]

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.

Re:Defend flash trading?

[khallow]

But I've yet to see someone discuss how the added-value of millisecond liquidity is substantially superior to having exchanges post transactions in 1-sec. intervals to discourage millisecond arbitrage during which no new events have occured and no new market analysis has taken place, only speculation and playing the system against proper investors? Can someone illuminate me on this point?

For starters, a big value add is that your market isn't trying to discourage microsecond arbitrage, speculation, taking advantage of others' bad trading strategies, and other legitimate trading activities. I know a lot of people don't get this, but the point of a market is to enable trade not discourage it. Benefits of such trading are better liquidity and more accurate pricing, you know the usual stuff you've heard before.

Re:Defend flash trading?

[Red Flayer]

If you fail to diversify your assets it's nobody's fault but your own.

Re:Defend flash trading?

[Anonymous Coward]

It won't make any difference. If you throttle, they'll simply come up with new and effective ways of gaming the new rules.

An arbitrary 1 second delay introduced into everything will simply serve to make markets MORE voltatile and LESS efficient, and the people with the money to throw mainframes at it will find ways to turn that new rule to their advantage.

Re:Defend flash trading?

[sjames]

And that is 100% fine. Because everyone has better information, less people make disadvantageous trades. Now we move on to the real experts vs people with a lot of dollars and no cents. What should you actually put in knowing that it will be an hour before the clock ticks to the next quantum? You have an average of 30 minutes to work it out.

Too high and you make nothing. Too low and you take a bath. You might need to (OMFG!) know something about the company whose stock you are trading!

The only people who actually benefit from the extreme liquidity are the parasites that game the market rather than investing in businesses.

Re:Defend flash trading?

[Anonymous Coward]

The issue here is you're simply going to move the algorithms from "lowest latency possible" to "most gaming in 1 second intervals possible."

Algo trading - done intelligently - will ALWAYS beat "little guys," and shouldn't even be considered. If you're a "little guy" trying to beat Goldman, you're gonna lose.

Think of it this way: When you want to buy 10 shares of Facebook to hold for your retirement plan, one of those HFT guys might well be selling you his shares.

You might be buying at $22.07, and he very well might have purchased at $22.01, but you got the liquidity *when you wanted it*, and he made a 6 cent profit on the transaction, which will get aggregated millions of times a day. Did you "lose" 6 cents? No, not if there was nobody selling at 22.01 when your order executed. And if there were, your order would have been matched to their better price. So you got the stock when you wanted it, at a price you were happy with, and he made a few pennies. Now, since you're buying a stock, we can assume you believe in the stock's fundamentals, and are expecting FB's stock to either climb, or begin issuing hefty dividends - either way, if you're concerned about 6 pennies over the lifetime of your ownership of that stock, then you are trading for way-wrong reasons.

Unless you're ALSO engaging in hft, the millisecond-timeframes of hft algos are largely irrelevant to your purchase. If you really want to make things fair, then Congress should create a binding obligation for people engaged in HFT to also register as market makers, who cannot drop out of the market if things turn sour, as during the flash crash. If they are creating conditions that can cause the market to freeze like it did, then make them responsible for bearing the costs of it as well. Trying to impose some sort of restriction on "how fast" they can trade is silly, because it doesn't address the fundamental issue - it just introduces artifical levels of inefficiency into the market.

Re:Defend flash trading?

[sjames]

There is a happy medium. When the quantum is long enough for human thought to take place, the more intelligent trading makes the tick more effective than mindless algorithmic trading would. Less cycles are actually necessary. At some point, the trader will know as much as he is going to and with have given it as much original thought as he can (any further thought would just be re-hashing). There's your maximum.

One second is too short. Make it 10 minutes. The algorithms will have to be damned good to deal with that because they are now facing actual human intelligence. They only work at all now because they leave any position they take too quickly for humans to spot their blunders and move in.

Re:Defend flash trading?

[blippo]

I think hidden orders, and matching once every 15 minutes is even better...

Re:Defend flash trading?

[Anonymous Coward]

Modded overrated because of the idiotic implication that the government forces employers to treat their workers like shit through regulation.

Re:Defend flash trading?

[blippo]

I'm not in a hurry, if the HFT guy didn't exist, the sell order is probably still around, and I will get my 6 cent... If not, I can wait.

So, The risk without the HFT guy is that my trades will take longer.

On the other hand, HFT -and- fast algo trading increases the risk for a market collapse, if not only for the increased number of trades (too quick for human analysis) and the emergent properties and complexity from the combined actions of the algorithms and people. No bugs are needed.

Re:Defend flash trading?

[Anonymous Coward]

Having worked with some of these firms in the past, I can tell you that it goes well beyond the "1 second" edge. These firms by network switches that have less than 1 microsecond of latency, even balking at switches that have .8 microseconds of latency because there are switches that have .6 microseconds of latency. They all colocate with the exchanges to get as fast as possible... it isn't a game of seconds any more, but a game of microseconds.

Re:Defend flash trading?

[tolkienfan]

Actually, that would merely serve to widen the spreads, and the cost would be borne by the investors, not the HFT market makers.
Market makers are the ones whose prices appear on the books. A market maker makes less than a tick on each trade. Market makers are in competition with each other. If the bid-ask spread were 1c but the trades had a fee of more than that, the market maker would lose money. So they would have to set the spread greater than he fee. This doesn't hurt the market maker.
In fact, hurting the market maker is a bad idea in general. It reduces liquidity, decreases efficiency and increases cost to all traders.
What problem are you trying to solve here?

Re:Defend flash trading?

[tolkienfan]

What's the point of discouraging arbitrage?

Re:Defend flash trading?

[tolkienfan]

That tax makes no sense either in its original form or in its later amended form.
It was trying to prevent countries for having to increase interest rates caused by speculators suddenly selling their holding in the currency. But he apparently didn't notice that those holdings occur on the order of seconds or less. Therefore the net effect is 0. Also, the amount of currency on offer at a bad price is limited. When the arbitrageur hits that price level there will be no more, unless someone quotes more badly priced currency.
Arbitrage necessarily makes the market more efficient, and the faster the more so.
An almost identical argument applies to stocks.

Re:Defend flash trading?

[tolkienfan]

This is a widespread, ill informed opinion.
All the research points to the exact opposite: HFT lowers overall trading cost.

Re:Defend flash trading?

[Anonymous Coward]

From what I remember about the flash crash:
One HFT* was pouring in offers outrageously far off the bid/ask with a microsecond expiration**. The volume caused the nyse servers to slow down. It turned out the nyse matching queue had a bug were matches were published with the time reported as the time they Entered the queue, not the match time. This bug, combined with the slowdown, caused the nyse to publish prices that were behind the market movement, arbitraging systems pounced, compounding the overload problem, leading to an instant feedback loop.

*who? I'm not sure we ever found out. Also, the nyse isn't going to complain because the real problem was their bug, not their popularity

**why? Most people just see latest-trade data, but you can purchase level 3 data, which is ALL bids and asks. HFTs need that data. If AAPL is trading at $400 but Your system is entering bids at $.05, you can program Your HFT system to ignore all the $.05 bids. You are effectively using your $.05 bids to flood other HFTs with garbage that you know you don't have to handle.

Re:Defend flash trading?

[Anonymous Coward]

So, The risk without the HFT guy is that my trades will take longer.

No, the risk is that without the HFT guy, prices are skewed because the bid-ask spreads are wider, because the markets are less efficient. This means that the middlemen will make MORE money than the 6 cents the HFT middlemen do.

Your blithe assumption that "the sell order is probably still around" shows just how little you really understand about the markets. Those HFT guys? THEY're the ones placing the sell orders for you to purchase. Drive them out of the market? Your sell order just got a lot harder to fulfill, because you've basically declared that anybody "trading stocks and making a living off of arbitrage" is outlawed.

Your final paragraph just underscores your complete ignorance of how the market works. HFTs and fast algo trading provide liquidity. Look at any reputable economic study of the flash crash, and you'll see the conclusion that *hfts ameliorated* the severity of the crash, and were not the cause. But of course, it's easier to just read Dkos and HuffPo and parrot what they say about how evil all the financial types are because they're successful at making money. Market volatility is fundamentally an *emotional* response to news about a company - driving *emotional* responses out of the market in the form of hfts & algo trading is a GOOD thing for volatility, which means the markets are more efficient, which means you get a fairer price when you're looking to buy.

Go learn something about the markets before you hold up your ignorance of them as some sort of profound insight. Please.

You want to solve any possible problem with algo/hfts? Make a condition of allowing them the ability to do hft an obligation that they continue trading and function as legitimate, official market makers, even during downturns. Boom, any POSSIBLE problem with HFTs and algo trading is instantly solved - they can't take themselves off the market and dry up liquidity further.

Re:Defend flash trading?

[tolkienfan]

Liquidity is provided by market makers - participants who keep both buy and sell orders in the market. Such activity is risky - when an event occurs another participant will attempt to cross those buys or sells and pick them off for a quick profit. The market maker has to react very quickly to avoid losses. They gain a very small amount on most trades, but these picks and lose vastly more. The competition leads to increased reliance on low latency.
Also, market makers compete with each other, also forcing latency down.
Note that this reduces he spreads too - before HFT they were at 25c at least.
Liquidity providing and flash trading are very different things.

Re:Defend flash trading?

[Jeremi]

Are there any markets (real or simulated) that actually operate in the once-per-time-period fashion described in this thread? Speculating about how such markets might work (or fail to work) is fun, but it's no substitute for actually trying it out and seeing what happens...

Re:Defend flash trading?

[Jeremi]

My only question is why set it to 1 second intervals, and not say 1 hour or day or month intervals. What difference does it make?

I don't know that the exact value of the interval is what's important, so much as the fact that there is an interval, and therefore an upper bound on how fast transactions can be executed.

Right now you have a situation where the company with the shortest fiber-optic cable to the stock exchange can use its faster access time to game the market, and make money at everyone else's expense. By imposing a standard delay for all parties, this unfair advantage would (presumably) be neutralized.

Re:Defend flash trading?

[Anonymous Coward]

That's bullshit. They sit close to the exchange because the bandwidth coming out of them is just massive.

They want to execute quickly so that when a stupid (ie non-algo) trader sells something too cheap, their order to buy it is the first to arrive.

Re:Defend flash trading?

[tolkienfan]

None of those points have anything to do with HFT.

Re:Defend flash trading?

[tolkienfan]

Tearing a company apart to make a quick buck is short term thinking. Speculating could be called that too.
That doesn't mean they are equally bad.
When someone buys a stock and holds it for a short time then sells it, it only returns to the company if they buy back - a deliberate action. Usually it's another market participant who buys it. Why is it bad for the stock to change ownership?
What makes you think speculation is bad? Is it better not to buy the stock in the first place?
The government doesn't print money in response to some company's stock tanking. It might do it to cover obligations (bonds) that it has to repay, if tax didn't bring in enough revenue. Which it hasn't been. And given how raising taxes is political suicide the deficit will only increase. But I digress.

Re:Defend flash trading?

[gl4ss]

That's bullshit. They sit close to the exchange because the bandwidth coming out of them is just massive.

They want to execute quickly so that when a stupid (ie non-algo) trader sells something too cheap, their order to buy it is the first to arrive.

bullshit? it's exactly what I said. that the ms intervals are there so that specific machines get an edge. so it's not about who's best at trading or coding an algo, but about who's best butt buddies with the guys deciding how/where the exchange connects with the outside world.

Re:Defend flash trading?

[kyrio]

Don't be retarded enough to accept stock over cash?

Re:Defend flash trading?

[Cederic]

I don't have an issue with that. I do have an issue with ignoring a whole swathe of transactions just because someone's programming cost them a lot of money.

Fuck 'em. They fucked up, they can take the hit. If it takes down their company then hey, that's fine.

Lets face it, my pension scheme lost 7% of its value last year anyway, losing some major traders can't be any fucking worse.

Re:Defend flash trading?

[michelcolman]

Those stocks stopped trading and became worthless, but not right away. After the bad news came out, there were still plenty of people going in for a bargain hoping the news would not be as bad as everyone thought. Those people will be there whether the time between trades is milliseconds or hours.

Being able to trade on a millisecond time scale just allows the big players to get out of a position faster than the rest of us who have yet to digest the news. If some news item does indeed make a company completely worthless beyond any doubt, I don't see why it would be "wrong" for the stock to become worthless right away and stop trading, for everybody including the big guys, rather than allowing the quickest institutional players to get out during the milliseconds after the news bulletin.

Usually, though, stocks don't "go to zero" and the stock will keep trading for many days. Having an hour between trades wouldn't change that. And if the company really did become worthless immediately so that nobody would want to buy it, then so be it. That has nothing to do with liquidity. Why would it be better for a stock to slide to zero over the course of an hour rather than stop trading right away? Would that have any benefit to regular investors?

Re:Defend flash trading?

[michelcolman]

There are indeed. It's how markets used to work, and some low volume issues are still traded this way, with one or two "fixings" per day.

Re:Defend flash trading?

[AF_Cheddar_Head]

Except pensions don't have to be unfunded liabilities. In fact most union contracts required the company to fund the pensions by setting aside the money in the equivalent of 401K funds. What happened is the companies didn't set aside the money, or they hired an accountant/banker that used optimistic numbers to project the growth of the funds and thereby put less than necessary into the fund, or corporate raiders (Bain Capital anyone) bought the company, declared bankruptcy and raided the retirement fund with the permission of the bankruptcy court. The corporate raiders even calculated the money that they would get from defunding the pension funds into the calculation into whether to buy or not.

Re:Defend flash trading?

[hairyfeet]

Because speculation does NOT reward long term thinking, which is required for real growth, but "get rich quick" schemes that often hurt the company long term, such as "slash and burn" which is practically a death knell for a company but it'll cause the speculators to jump on the short rise before the fall which gives CEOs a chance to cash out. End result? dead corp, tons of workers out of a job, those that didn't dump the stock quick enough fucked, rich CEO and insiders.

But that is the problem in a nutshell, the stock market was designed for investors not speculators and by throwing all this money into the system you might as well call it "Las Vegas East" and call it a day, because frankly what they are doing is no different than gambling. With investing you actually LOOK at the company, what their plans are, what their market for their product or service looks like, what plans they have for the future. this is based on actual VALUE, what the company actually makes or what services they sell.

With speculation its just throwing darts on a board, or worse looking for ever shorter term gains no matter the cost since the holder of the stock may not even hold onto it for more than a few minutes. In the end speculators would reward you for burning the company down for the insurance, since after all you're not paying for employees and electricity this very moment are you? and THAT is the problem, it rewards moment by moment thinking while punishing those that actually try to grow their company because growth requires capital investment, which was what stocks were supposed to be for, gathering capital to grow your business!

Re:Defend flash trading?

[hairyfeet]

Preach brother! Now that my dad is getting older he would LOVE to hire some gophers to lighten the load so his trained electricians can just worry about the wiring while the gophers do the fetch and tote, but he can't, why? Regulations they passed say only certified workers allowed on the job or his insurance goes through the roof!

So that is 3 to 5 workers he simply won't hire because it'd cost him a good 6 months to a year and thousands out of his pocket to get them trained and certified when all he wants them to do is haul wire and fetch loads from the garage. of course once they've gone through all the training and bullshit to be certified they want to do over things than being a gopher so he's right back where he started!

The sad part? there is NO PARTY that is for smaller government, none. the Rs pass just as much nasty regs as the Ds, it is simply rewarding different check writers, that's all. Both sides want bigger government, more power to the government, less power to the people. i agree that sooner or later we'll have another depression (if we haven't already started which I'd argue we have) and maybe when the whole thing collapses we'll see REAL hope and change, but we sure as fuck ain't seeing it now from Ds or Rs.

Re:Defend flash trading?

[tolkienfan]

You just restated your opinion.
Speculators buy and sell equally - their effect on value is zero. It takes a large disparity between aggressive buys and sells to move a price. How large depends on how liquid the stock is.

Re:Defend flash trading?

[hairyfeet]

Riiiight, and when the lotto goes up people don't buy more tickets using your logic? Either you are being purposely obtuse or are trolling, I can't tell which.

Maybe a final example will get you to understand...one of the last CEOs of Westinghouse before it went under was brought in to "right the ship" and was given generous stock as well as his huge CEO check, what did he do? he did a total slash and burn, anything that was making a cent, any building he could get a dime for, patents, he sold it all.

Now if this would have been before wall Street became Las Vegas the investor would have taken one look at what they had left on the books and said 'Holy shit, they have nothing left but a shell of a company!" and they would have stayed the fuck away from it! But because speculators have almost ZERO knowledge of what is actually going on they saw short terms gains were up and the stock shot through the roof!

So what happened? CEO cashes out and walks away with a pile of money, those that don't sell their stock in time become penniless, insiders get rich, people lose their jobs. Every damned bit of that is due to SPECULATORS, okay? Because they are gonna flip that stock in a day if not an hour they don't give a rat's ass if the company burns as long as there is some short term movement in the stock. its nothing but the housing bubble all over again, where everyone was flipping and flipping until the morons that can't flip it at the end of the bubble lose everything while those at the top of the Ponzi get the cash.

Believe what you want, doesn't matter anyway because by 2020 it'll be all over. They have allowed this bubble to grow so damned big that any normal downturn becomes catastrophic because the speculators run like sheep at the slightest movement. They have already had to bail out once, Greece is gonna go under along with the rest of the PIIGS and frankly there isn't enough money in all of EU to take care of that debt, and the end its because its ALL in the market, every damned cent. Its this speculator BS that made Apple lose value every time Jobs sneezed, that has cost Zuckerberg half a billion this past month, its because nobody looks at what the company actually makes or sells, its about the stock and not the company, get it?

Because there is so much money in the system a little pump and dump and you could have "international cornholers" shooting up the charts, what do they make? Who the fuck knows? who the fuck cares the stock is going up! And THAT is it, that is the problem...got it?

Re:Defend flash trading?

[tolkienfan]

Pump and dump usually uses news and similar to push up the price. And it's investors that buy into the news.
No one really speculates anymore anyway. It's just as likely to lose money as make it. In the long term that means losing everything due to fees. Traders always hedge these days. Usually even arbitrageurs.
Buying a stock simply because it's seen recent gains is just as likely to lose you money as make it.
Facebook tanked exactly because investors DID look at the fundamentals, and they saw a company that has already captialized on its market and doesn't seem likely to appreciate much future growth. It's evidence AGAINST your position.
Also, nothing you've said has anything to do with HFT or Knight.

Re:Defend flash trading?

[Crosshair84]

The sad part? there is NO PARTY that is for smaller government, none. the Rs pass just as much nasty regs as the Ds, it is simply rewarding different check writers, that's all. Both sides want bigger government, more power to the government, less power to the people. i agree that sooner or later we'll have another depression (if we haven't already started which I'd argue we have) and maybe when the whole thing collapses we'll see REAL hope and change, but we sure as fuck ain't seeing it now from Ds or Rs.

The Democrats want to spend spend spend, and Republicans have no reason not to spend. The cause is the same, fiat money. The government knows full well that there aren't enough rich people to finance all their spending, they have to get it from the middle class and poor. Of course if the government had to raise the taxes on that single working mother to the level need to pay for all the spending the politicians wouldn't last long. So they simply tax that same single working mother via inflation. The politicians can then blame the inflation on foreigners, bankers, greedy businessmen, speculators, etc. Anything to deflect the true source, the government itself debasing the money to finance its reckless spending.

Re:Defend flash trading?

[carnivore302]

I totally agree. There are so many uninformed claims around HFT and trading financial products in general, it's just pathetic. Another one that constantly resurfaces is the ban on short selling.

Trust but verify everything...

[Anonymous Coward]

It's always a loss, never a gain.
I worked at one of the fine SXs - this happened to cover something up.

CAPTCHA = dodged

Too bad

[sanosuke001]

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.

Re:Too bad

[pnutjam]

They did save the game before running the software.

Re:Too bad

[muon-catalyzed]

> NYSE to make sure companies don't do something stupid

NYSE casino crew are happy observers here, they profit from these fast trader pigs, they get fat fast, then slaughtered fast, making NYSE rich in the process.

Re:Too bad

[GameboyRMH]

I wonder how long until they get quicksave and quickload hotkeys.

Re:Too bad

[cp5i6]

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.

Re:Too bad

[Anonymous Coward]

I think you missed the part of the summary where they said "the NYSE canceled some of the trades".

Re:Too bad

[Anonymous Coward]

Do you know what "some" actually means in this case?

Re:Too bad

[Anonymous Coward]

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.

Well, Reuters claims otherwise in their article, http://www.reuters.com/article/2012/08/01/us-usa-nyse-tradinghalts-idUSBRE8701BN20120801

The NYSE said in the afternoon that it would cancel trades in six different stocks, including Wizzard, China Cord Blood Corp (CO.N), E-House Holdings (EJ.N), American Reprographics (ARC.N) and Quicksilver Resources (KWK.N).

Trades executed at 30 percent higher or lower than the opening price will be canceled, NYSE Euronext (NYX.N) said in a statement. No trades in any of the other affected stocks will be canceled, the NYSE said later.

Now Reuters may have gotten the story wrong...

Re:Too bad

[MarkGriz]

-The algorithm, rather stupidly, bought high and sold low.

“I always do that. I always mess up some mundane detail"

Re:Too bad

[cp5i6]

erm Knight reported a 440mm USD loss. THey know it, they said it.

They took all 4mm trades they did on those securities, realized the loss and pinpointed it at 440mm, they know that because NYSE said that only 6 stocks where the trades executed at 30 percent higher or lower than opening price will be cancelled.

Reuters reported nothing wrong, and I have stated nothing contrary to that.

Knight is on the hook for the full 440mm USD loss.

Re:Too bad

[cp5i6]

Oops i implied all of the securities that day and not just the 6.

Re:Too bad

[TFAFalcon]

Will the other parties of these trades be compensated for the cancelations? If Knight lost money, then someone must have made it. So why does NYSE get to take their winnings away?

Re:Too bad

[ceoyoyo]

"NYSE stuck them with every single trade that they transacted during the particular time span."

"Trades executed at 30 percent higher or lower than the opening price will be canceled"

Those statements (yours and the NYSE's) seem to be contrary, unless you're relying on "during the particular time span" as weasel words. I'm not saying you are, but can you clarify?

Re:Too bad

[Anonymous Coward]

NYSE didn't get to take any winnings. The buyers and the sellers were the ones that made all the money that Knight lost. That is why NYSE won't reverse the legitimate trades; if they did then the buyers and the sellers would lose out.

Re:Too bad

[HeckRuler]

and is $440 million the total amount of money that they threw around with this glitchy software?

Re:Too bad

[citylivin]

"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."

How is buying something literally milliseconds before a "real" buyer, jacking up the price and then selling it to the "real" buyer (who actually wants it), a millisecond later NOT gaming the system? Because you termed them "market makers"?, whatever the fuck that means! (there is already a market if people are buying and selling to eachother, so what are they "making")

If I sat in the line at the supermarket, and when people put their goods on the conveyor belt, i immediately bought them from the store, and then almost immediately, sold them to the customer who originally put them there at a small profit, it would be obvious that this would be wrong. I haven't added anything, the person still gets the exact same product, but in those few seconds, i have made them pay more. I do this because I have fancy computers and lots of money to buy up the stores inventory and hold onto it for a few seconds.

Would that be fair? is that what society should be doing? Middlemen everywhere jacking up prices for people who just want to buy a god damn apple? Please explain to me why with tangible goods, this would be a ridiculous practice, but with electronic bits, it becomes normal procedures. Please explain why these people should exist, and what real world value they are adding to the stocks that they momentarily hold. Why don't you let the buyer and seller work out a fair price on their own?

Re:Too bad

[Anonymous Coward]

-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.

If someone lost money, someone made money. These four points sound too suspicious to me.

Re:Too bad

[cp5i6]

nono I made a mistake with that last post which is why i tried to reply to myself.

the 440 mm is real, every single trade that attributed to that 440mm will not be unwound by NYSE.

it already took into account all of the trades that NYSE has said would be canceled, which is the 6 stocks where the trades executed +/- 30% opening price.

Re:Too bad

[cp5i6]

what you are talking about is front running and that is illegal.

The sec will absolutely fine you a rather large sum of money if you try that.

Look up the definition of a market maker. It is not a random term I threw around.

The market makers make a spread as a commission for offering liquidity to a particular market place. In your apple example, if the farmer grows an apple at 5 cents, and there is no middle man to deliver it to you, are you implying that you still should be entitled to pay only 5 cents for the same apple?

Re:Too bad

[Nimey]

Knight is a market maker. Their sole purpose on NYSE to ensure liquidity and make money.

You're the second person to post that in this discussion to defend HFT. Is this a talking point in the WSJ or somewhere else?

Re:Too bad

[Whorhay]

The NYSE though is the middleman already. They are there to facilitate the trade between the apple grower and whoever is buying the apple. I don't see the advantage in adding a second middleman who is given market advantages just so he can make more money at the expense of the seller and the buyer.

It sounds like the following:
The apple grower takes his product to his existing middleman, the NYSE, and says I want at least 5c per apple.
A buyer at nearly the same time puts in a buy order with the middleman for 6c per apple.
I would expect the middleman to match these two orders and split the difference for the price at 5.5c and takes his minor commision. This way both the seller and the buyer get what they wanted, in fact a little more.

What it sounds like is happening is that the second middleman, HFT, skips the first buyer in line and grabs the apples for 5c and then sells them to the guy he just skipped in line for 6c per. This sounds fair because both the original seller and buyer got what they were looking for albeit at the worst price they were asking for.

At best so far as helping the market the HFT has provided a ever so slightly faster sale than the seller would have had, although if the HFT is skipping the line then that's not true as they are displacing another buyer. In this day and age do we really need to give advantage to market vultures, which is actually a disservice to vultures the world over as they are important parts of the ecosystem.

A nice strawman example could go like this. Natural disaster strikes. Everyone is at the stores buying up emergency suplies, I leverage my savings account and buy out all the bottled water. Then turn around in the parking lot and sell it all off for a profit.

Re:Too bad

[ceoyoyo]

I don't think you're purposely being misleading, but I don't think the $440 million number actually makes any difference. Whether Knight lost $440 M and is on the hook for $440 M - X or if they lost $440 M + X and are on hook for $440 M doesn't affect the argument. The NYSE cancelling orders after the fact means that losses, almost certainly Knight's, are mitigated artificially.

Re:Too bad

[cp5i6]

Unfortunately that's not the way it works, this is a very efficient market. Would you pay 10$ for a steam game if it could be had for 3.99$?

take your example with the apple seller

The apple grower (seller) takes product to a market place (NYSE) and says I'm going to sell it for 5c per apple, the ask.
To create a market, the Market Maker like Knight will now put in a bid for 4 c because that is their purpose, to create liquidity in a market place.
Now we have 2 choices. the seller can decide to sell that apple to the Market maker for 4c or he can just wait around until a Buyer comes in and buys it from him at 5c.

Choice 1: the seller sells it to Knight at 4c. Knight now owns the risk on the apple potentially falling further but in the mean time, the Original seller sold his apple and has none left. Knight will now put an offer , the ask, on the apple they bought for say 4.5 cents (to help move it faster). They will also at the same time lower their Bid in case more apples are for sale down to 3c.

Choice 2: Another buyer comes in and buys the apple from teh seller at 5c. The buyer gets his apple at 5c, the seller sells at 5c. The market maker is completely not involved in this transaction. What the market maker will do though, is now set a sell price at 6c to create a market place.

Now where the market maker potentially can overstep a smaller investor is that the market maker obviously knows the best prices since they're making the market and see what's out there. if they are desperate to dump the apple they bought at 4c and try and sell it at 4.5c and another individual seller comes in at 4.4c, the algorhythm may then say "shit the market is moving down, look for the best price I can sell my position at" If a buyer steps in at 4 cents, the algo will automatically offload the position before the seller can make that decision. But that's why you have things called limit orders or market orders. Limit makes sure you get what you want if the price moves the way you want.

the exchange in all of this is simply a market place. They are not the middle men. They provide for you a service where you have a market place to trade your goods and charges you for the right to trade on the exchange. Much like if you were in a farmers market, you'd have to rent the particular stall.

Why the double standard?

[JDG1980]

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.

Re:Why the double standard?

[Genda]

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:Why the double standard?

[Anonymous Coward]

On the other hand, those accidental sells significantly affected the price of certain stocks. If you are an average investor holding onto one of those stocks, wouldn't you rather the trades were canceled so you didn't take a bath due to someone else's error?

Re:Why the double standard?

[Anonymous Coward]

What's wrong with reinforcing the perception that Wall Street is a casino rigged in favor of the rich?

Re:Why the double standard?

[Anonymous Coward]

NYSE cancelled trades in 6 names that were more than 30% off the opens (I think it was the opens). They had this issue in something like 140 names, so it's hardly like they said "whoops! do over!" They have lost a huge amount of money.

Re:Why the double standard?

[Anonymous Coward]

NYSE canceled only some of the trades in 6 stocks out of millions of wrong trades in 150 stocks.

I am assuming that these trades should never have been done. ie, after a 10% up move a stock should have hit a circuit breaker, but did not do it for a while. So NYSE cancels these trades post fact. Similarly, exchanges have an obligation to route trades to other exchanges when a better bid or offer is available elsewhere. If NYSE made a trade at a price too high while a trade was available on Nasdaq, NYSE is in trouble. So they probably canceled those trades too.

Knights counterparty is likely to benefit in most of the canceled trades. Don't know who was trading against Knight, but if you consider Knight rich, then the market (NYSE) worked against them.

Re:Why the double standard?

[ranton]

On the other hand, those accidental sells significantly affected the price of certain stocks. If you are an average investor holding onto one of those stocks, wouldn't you rather the trades were canceled so you didn't take a bath due to someone else's error?

If you just randomly bought a stock whose price went up over 30% in 45 minutes (the criteria they used to determine which trades to cancel), then it your own dumb fault that you lost money. Anyone who was holding onto these stocks were not greatly affected, because the prices already returned to normal after Knight Capital Group had to sell those inflated stocks back.

Re:Why the double standard?

[Karl Cocknozzle]

On the other hand, those accidental sells significantly affected the price of certain stocks. If you are an average investor holding onto one of those stocks, wouldn't you rather the trades were canceled so you didn't take a bath due to someone else's error?

I think you might fundamentally not understand the value of stock shares. If the share were under-priced by a "mistake" trade the market would pretty quickly figure that out and value-seekers would flood into the issue and bring the price back to where it needs to be.

However, this is not an endorsement of high-speed trading via algorithm... That's just market-rigging with a fancy name. This is just a reminder that the "market" part of "stock market" still plays a role, even if GS et al are gaming the shit out of the system.

Re:Why the double standard?

[Anonymous Coward]

If you were an average investor holding the stock and the price returned to normal levels (which it did), how would you take a bath?

Re:Why the double standard?

[gl4ss]

On the other hand, those accidental sells significantly affected the price of certain stocks. If you are an average investor holding onto one of those stocks, wouldn't you rather the trades were canceled so you didn't take a bath due to someone else's error?

for every "bad trade" someone else made money by buying them when they were cheap.

what's fair? that the fuckers who get to place their machines at the exchange switches get both edge in latencies and a reverse button? I'd like to just ask "what the fuck?"

there should be a simple rule of no backsies. there's no backsies in quake - why would there be backsies in stock market? reversing all these trades would detoriate belief in stock market, it would be just underlining that it's just a system meant to funnel money to exchange runners best friends and not for trading and receiving money for investments.

Re:Why the double standard?

[ranton]

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.

Re:Why the double standard?

[GameboyRMH]

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.

Good, I hope everybody finds out.

Re:Why the double standard?

[na1led]

It's worse than a Casino. Look what happened to Hedge Funds in 2008.

Re:Why the double standard?

[gl4ss]

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!"?

Re:Why the double standard?

[microbread]

Because when you start dealing in those sorts of volumes, you start affecting other things unintentionally. Lone maverick (amateur) traders, even with a few million in the bank don't have much effect on the markets by themselves. Note that over 140 stocks were fingered here, very very few individual traders (not funds) can do that sort of damage that quickly. If it's not checked, it can be devastating to businesses. If you suddenly snap up half a billion in GE stock, you'll turn heads. It doesn't sound like the NYSE agreed to cancel them, they simply decided to cancel them to prevent further damage being caused. Additionally they make a good point that there are plenty of normal people with stock linked savings accounts which could be affected. Naturally you sign up to some sort of risk and waive all damages, etc, but the damage should be limited to companies going bust, not some nutjob corp destroying the price through negligent programming. This isn't just Knight's money, it's *our* money as well.

Re:Why the double standard?

[MickyTheIdiot]

why... that's socialism. Let's get your ass thrown out of the country.

Re:Why the double standard?

[istartedi]

This is why I would never, Ever, EVER script a trade. Ever. Let me repeat that for those who might still be tempted to use those trading platform "features". NEVER DO IT.

It's bad enough that I might botch the script, but they might botch it too.

Also, there's a saying in Vegas: speed kills.

Why, praytell, would anybody want to accelerate their trading? It makes sense if you're a market maker who can reliably make money on spreads and volume; but that's not Joe Blow using eTrade API or any other such carrot that the big online brokers are dangling in front of geeks.

If anything I have actualy been working to *reduce* the number of times I trade. I definitely don't need technical risk added to market risk, 100X more times per day.

Re:Why the double standard?

[PRMan]

No, but if you MADE money with your own software by finding a weakness in their algorithms, they would cancel it and arrest you: http://www.financial-planning.com/news/norwegian-day-traders-timber-hill-2668351-1.html

Re:Why the double standard?

[Chuckstar]

The article did not say that trades were canceled for Knight Capital. There would have been other trading in those stocks between other parties. It is possible some of those trades have been reversed.

Re:Why the double standard?

[Anonymous Coward]

They canceled the trades because they were suspicious, not because the trader would have lost money.

Re:Why the double standard?

[TFAFalcon]

Isn't the stock market supposed to be very good at deciding the 'right' price for shares. So if some companies shares loose value due to a maverick, shouldn't the market bring the right back up again? Or is the marker just a pile of gamblers that have no idea about the companies they are trading in, dumping stocks as soon as they look their price is going to drop, with no regard to their actual 'value'?

Re:Why the double standard?

[nitehawk214]

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 the double standard?

[bill_mcgonigle]

This is why I would never, Ever, EVER script a trade. ... Why, praytell, would anybody want to accelerate their trading?

Personally I wouldn't script for speed, but I'd script it because I don't want to sit and watch prices all day. Follow this sequence of prices and tell me where we should buy:

    50 48 47 48 46 45 42 43 44 45 48 45 43 41 39 40 43 45 46 45 49 51 52

If I just put in a limit order in to buy at 45, I'm doing OK. If I script it so that I buy when the price has fallen by 10% from the day open but the current price is higher than the previous price, then I bought the same trade at 43. A better algorithm might have bought at 40.

Yeah, I briefly flirted with a startup to offer this kind of service back in the 90's. We weren't well-connected enough to overcome the capital requirements to overcome the regulatory requirements.

Re:Why the double standard?

[Anonymous Coward]

It doesn't sound like the NYSE agreed to cancel them, they simply decided to cancel them to prevent further damage being caused.

How exactly do we determine which trades cause "damage"? Is damage here defined as causing Knight to lose money? Can trades that I perform which cause damage be reversed? Who gets to decide which trades cause damange and which damaging trades get reveresed?

Re:Why the double standard?

[ceoyoyo]

If I were an average investor I'd just hold onto the stock for the hour (day, week) it took to go back up to it's actual value. I might also buy while the stock was artificially low.

Re:Why the double standard?

[michelcolman]

The only problem is people with stop orders. You buy a stock at $10 with a stop at $8 just in case something happens while you're on vacation. Knight starts selling the stock, your stop gets executed, then the price moves back up to $10.

Of course you could argue that it's their own fault for using stops, but these stops do serve a purpose and it's Knight's fault that they got executed. Just like deliberately manipulating share prices is illegal, maybe firms should be liable for losses resulting from accidental manipulation of prices.

Re:Why the double standard?

[michelcolman]

By having a stop order executed? Or by getting a margin call? (OK, the latter are maybe not for "average" investors but quite a few ordinary people like you and me do have a margin account).

Re:Why the double standard?

[michelcolman]

If Knight was selling low and buying high, how is their counterparty going to benefit from having those trades canceled? And what if you made two trades and only one gets canceled? You may even end up with a short position at a loss instead of a gain.

And why is it that HFT firms can execute thousands of trades per second while the NYSE is unable to halt trading after a move of 10%? Are they the only ones still using pen and paper?

Re:Why the double standard?

[michelcolman]

I don't know exactly how their scheme worked, but I have often thought I might be able to do something like that quite easily. I have often been frustrated by seeing a bid/ask at 0.18/0.20, trying to buy at .19, seeing the spread move to .19/.21, changing the order to .20, seeing the spread move to .20/.22, finally settling for .22, then seeing the price drop back down to .18/.20 minutes afterwards. After having had that experience a few times, I started wondering: what if I wanted to buy this option, but put in sell orders instead of buys? Then, when the price has moved down enough. suddenly cancel the order and immediately put in a buy order at the current ask price.

Is that more or less what they did? I know media tend to exaggerate, so the "reverse engineering" may well have been as simple as that. I could imagine myself doing it, too! And then get thrown in jail for it? Extremely unfair if you ask me.

Re:Why the double standard?

[Anonymous Coward]

Are margin requirements calculated in real-time or based on closing prices?

I'm not convinced leaving a stop order in the markets unattended is something you should expect to work...

Re:Why the double standard?

[michelcolman]

But if you're attending it, why use a stop? The whole point of a stop is to curb your losses if an unexpected move happens while you're not watching.

I agree that it's a bad idea, but apparently it's useful enough for quite a lot of people to use it. Why else would it exist?

Re:Why the double standard?

[BoberFett]

The stock market hasn't been about investing in a long time, if ever. Anything beyond the original stock issuance and sale is simply gamblign. How many of these "investors" that cry about things like HFT own stocks that pay dividends? They're only in the market to score a bargain and sell high to some other sucker who hopes he can sell even higher.

Re:Why the double standard?

[Anonymous Coward]

Post all the past performance data you want that your algorithm works for and I'll post data that it would get worked over on. You should be coming up with inherent values for a stock and buy when it is below that value, NOT when you or your algorithm thinks it's gonna spike up for no discernible reason.

Re:Why the double standard?

[sjames]

Yep, we can't have the riff-raff getting all uppity and thinking they can make money like a 1%er!

Re:Why the double standard?

[Anonymous Coward]

Actually, yeah they would. If you had enough capital to completely disjoint the market for a particular stock, some of those trades would be declared "clearly erroneous" and busted by the exchange. I don't think a 440 million dollar loss, equivalent to their last four years of profits, is a mulligan- do you?

Aside: This is a technology site, I don't expect the average /.'er to really understand financial markets. Hell I have worked in financial markets for 10 years as a programmer and there is a whole shiatload I still don't understand. But what I find really disconcerting is how many people feel qualified to comment on a system they don't know the basics of. What's worse, is watching the group think kick in and mod everyone up who bitches about whatever sounds good at the time. It makes me question the accuracy of any topic discussed that I don't know about.

Re:Why the double standard?

[Clifton Beach]

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.

Re:Why the double standard?

[Anonymous Coward]

Wait - what happened with Hedge Funds in 2008? There were a few that did very well (Paulson springs to mind). But most of them did pretty horribly in 2008. Not a single hedge fund has been bailed out with public money to date. In 2008, some investment banks were bailed out - but that's a bad term. What really happened is that they got some whoppingly big loans, which were done at interest rates pretty favorable to the US Govt. which most of the banks promptly paid back.

But no hedge funds were bailed out.

You could argue that by bailing out the banks, the hedge funds were saved. But so were your 401k $$$. You can't save one without saving the other.

Re:Why the double standard?

[Anonymous Coward]

Personally I wouldn't script for speed, but I'd script it because I don't want to sit and watch prices all day

Personally, if you're scripting your trades this way and letting them "follow prices all day," then you're speculating, not investing, and you deserve whatever losses you reap.

Where in that sequence of prices should you buy? You shouldn't. Period. Until you understand the business of the company you're buying, and believe that the value of the stock (either it's growth potential, or it's dividend/cash flow potential) are greater in the long run than the price of the stock.

If all you're doing is using the "current price" compared to some arbitrary "opening price" or "trailing price window" or anything else to decided whether or not to buy a stock, you might as well go to Vegas and bet it all on 7 black, because you're gambling as surely as any vegas roulette player is.

If you don't know what you own, if you don't know why you own it, and if you do not believe that the value of the stocks you've purchased is reasonable, then you are not "investing." It's really that simple.

Re:Why the double standard?

[Anonymous Coward]

There are well-defined rules to what NYSE considers to be a "clearly erroneous" trade. The rules will be followed for you, Knight, or anyone else.

unfairness in the markets at it's best

[Anonymous Coward]

If one of these bugs made hte company money, would there also be a retraction of the trades?

This is such horse snot. Why can't I as an investor be compensated for losses?

Algorithms versus humans

[dkleinsc]

On the one hand, algorithmic trading can screw up royally and cost hundreds of millions in a matter of hours. On the other hand, human traders can screw up royally and cost billions over a few months.

I'm not sure which is worse. And of course in combination they can crash national economies.

Re:Algorithms versus humans

[Anonymous Coward]

On the one hand, algorithmic trading can screw up royally and cost hundreds of millions in a matter of hours. On the other hand, human traders can screw up royally and cost billions over a few months.

I'm not sure which is worse. And of course in combination they can crash national economies.

The thing here is that while it cost the particular company hundreds of million someone else got those hundreds of millions.
When their scripts work as intended the siphons hundreds of millions from those who actually use the market for things that actually benefits the market.

Re:Algorithms versus humans

[only_human]

On the one hand, algorithmic trading can screw up royally and cost hundreds of millions in a matter of hours. On the other hand, human traders can screw up royally and cost billions over a few months.

I'm not sure which is worse. And of course in combination they can crash national economies.

One difference is that a slow moving wreck caused by humans with human consequences is within our toolset of things that we can react to and in some cases mitigate or avoid. A wreck that destroys things when you blink is on the wrong timescale for prudent reactions.

Re:Algorithms versus humans

[GameboyRMH]

That's like saying you're not sure whether it's worse to lose control of a landspeed car at 600kph or a go-kart at 60kph. One allows time for humans to react.

Re:Algorithms versus humans

[dkleinsc]

It's more the difference between trying to stop a car at 600kph and a barge at 10kph. Sure, the barge is going a lot slower, but it's also a much bigger object and a lot harder to stop.

Re:Algorithms versus humans

[Anonymous Coward]

Maybe try getting out of the way?

Re:Algorithms versus humans

[Anonymous Coward]

Yeah, look how much better human-scale reactions were to the panic in 1929. I mean, there was nothing but clear-eyed, steely competence in the "human-scale" responses of that panic.

I think we should blame that one on HFT as well. Since, you know, nobody here knows *what the fuck they're talking about* to begin with.

At least the stock analysts are on the job

[cpm99352]

Today, after the stock dropped 50%, analysts are beginning to downgrade the stock from buy to hold. Excellent analysis there!!!

http://finance.yahoo.com/news/knight-capital-downgraded-hold-buy-155956204.html

Re:At least the stock analysts are on the job

[GameboyRMH]

That what they get paid the big bucks for. It takes an experienced business leader to make these decisions.

Re:At least the stock analysts are on the job

[ISoldat53]

What I can't figure out from the reporting is where did the $400 million loss come from. Was it from losses on trades or devaluing of the company's stock?

Re:At least the stock analysts are on the job

[Anonymous Coward]

Knight Capital does not hold any of its own stock. If the stock price falls, the company itself does not lose any money. Lots of executives and board members and such lose money though.

Re:At least the stock analysts are on the job

[bobbied]

Today, after the stock dropped 50%, analysts are beginning to downgrade the stock from buy to hold.

Actually, that just might be a GREAT time to buy. Really bad news causes huge drop in stock price in a medium sized company (Bad earnings, lawsuit filed etc..) wait for the panic selling from retail investors and day traders selling short, then scoop up some shares on the cheap. Put in a limit order for 10% above your cost basis and wait. Usually the news is not as bad as the headline and about half the time you can make 10% in a few days and almost always you can get your original money out in a week. In a day or two the day traders will need to cover their shorts and the price will usually bounce. Just stay away from bankruptcy announcements and look for stocks close to their book values if you can.

Of course, if you have faster access to the information you can sell short and ride the really big money with the day traders, or by trading options... But that entails a lot more risk and takes a lot more money..

Re:At least the stock analysts are on the job

[nitehawk214]

What I can't figure out from the reporting is where did the $400 million loss come from. Was it from losses on trades or devaluing of the company's stock?

Both. They sold off stocks that were undervalued because of their broken algorithm. Then when the price turns out lower, the rest of their stocks are work less than before.

As to where the money went, anyone who bought at the low prices made money on the deal.

Re:At least the stock analysts are on the job

[michelcolman]

Of course they had to get rid of their own shares first. They'll downgrade them further to "sell" when they want to start buying again.

Re:At least the stock analysts are on the job

[Anonymous Coward]

You know there are laws about this kind of thing right? And mechanisms to enforce them?

Re:At least the stock analysts are on the job

[HornWumpus]

Their market cap was/is only $253 million. Assuming that's calculated on today's close they are fucked. If it was calculated on yesterdays close their creditors are also fucked.

Re:At least the stock analysts are on the job

[michelcolman]

And ways to avoid those laws?

I've just seen this happen too many times.

I'll give you just two examples:

- Lernout and Hauspie, once a world famous speech technology company based in Belgium. When the first rumors about fraud came out, it started raining "strong buy" recommendations from everywhere. The rumors were false or at the very least overblown, this was still a great company, the share price drop is the fault of short sellers, this is a perfect time to get into this great company, etcetera. Not just in Belgium, mind you. Yahoo! Finance was full of articles about how you should buy this company and multiply your savings, from pretty much all the big institutions. Then, later on, oops, it turns out the rumors were right after all. But all those regular people like you and me who believed the buy ratings, who do you think they were buying from?

- Fortis, a fairly large and internationally well known bank in Belgium and surrounding countries. Same thing, the rumors are exaggerated, there are some temporary liquidity problems but nothing fundamentally wrong, it's crazy for the price to be so low, short selling is to blame for this, now is the time to buy, if it goes back up to the old levels in a few years you will have multiplied your money by four! By ten! Oops, turns out the rumors were right after all, who would have known? Certainly not the big bankers who were sending out the strong buy orders! After all, how could they know what was really going on inside of Fortis? It's not like they knew anyone there, right? Errr... right.

Whenever my regular banker starts sending out advice to buy a stock (which only happens once every few years), I immediately look at the stock and consider buying put options.

Boom

[SaroDarksbane]

Apparently, losing 70% of their market cap in one day and shopping themselves around frantically hoping to be "acquired" before they go bankrupt is just "day-to-day minutia" for their CEO.

Anti-Robotic Trading

[DaMattster]

I am so against this robotic, automated, whatever-you-want-to-call-it trading that it serves Knight Capital Group right. I'm dancing a jig in the streets.

Why do we need uSec trading?

[RichMan]

Why not just a single trade resolution per day ?

Currently it is a race to be fast and their are all sorts of manipulations about being fast and doing algorithmic trading.
Dropping back to a single trade resolution per day would make it so much cleaner. Or may as many as 4 just to keep the traders occupied.

Trades would be done with 2 parts. The trade info which would be encoded and a seprate unlock key. The trade and key are kept separate until resolution begins. That way trades can be logged, verified and locked yet unknown before the resolution point And fully published to all after the resolution.

Re:Why do we need uSec trading?

[PRMan]

One per hour would allow for some strategy as the day commences, but not too much. 7-8 per day should be plenty.

Re:Why do we need uSec trading?

[seyfarth]

How about taxing short term capital gains at a high rate to discourage usec trading? Stock held for very short times is not really beneficial to society. The fast traders are siphoning money from the market. They should be taxed enough to force them to look for another job.

Re:Why do we need uSec trading?

[bobbied]

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:Why do we need uSec trading?

[Anonymous Coward]

But just imagine how much faster their trading would be if all these trading companies set up their own servers in the same room with a mesh-network between them.

High speed trading should be forbidden

[Anonymous Coward]

Not only HST should be forbidden, but the whole day trading "buy now sell tomorrow" thing. I wonder how any government can think this kind of "trading" (more like gambling) does any good to the world. A very small tax would stop this insanity instantly.

Re:High speed trading should be forbidden

[0123456]

I wonder how any government can think this kind of "trading" (more like gambling) does any good to the world.

Because the banks donate large amounts to their election campaigns.

Re:High speed trading should be forbidden

[Anonymous Coward]

Day trading is buy now, sell today, not sell tomorrow...

Plus, did you know the SEC already is funded by a small fee on every sale in US markets?

Re:High speed trading should be forbidden

[bobbied]

The unfortunate part of "free" markets is that HST is not something you can stop. Personally, I think that if you have a "no mulligans" policy, such traders are sufficiently constrained. So no rolling back trades unless somebody is breaking laws or the circuit breaker rules of the exchange are hit before they can halt the trades.

The quick money in the stock market is obviously the domain of big money and not the retail investor with 10,000 in his 401k. But understanding that, it doesn't mean there are not suitable investments for the retail guy or no reason to trade stocks. You just have to think differently and realize that you cannot trade on fractions of a point and make money.

The issue ins't algorithmic trading...

[Anonymous Coward]

The issue is canceling otherwise valid trades after the fact.

If you want to put computers in charge of your trading, then it's up to you to make sure that the programmers know what they're doing.

A $440M loss would make Knight Capital take a hard look at their trading platform. If they can't write decent computer programs, maybe they shouldn't put computer programs in charge of their trading.

But if Knight Capital gets a "do-over" because their programmers made mistakes, then Knight Capital has no incentive to improve.

Once again we get heads I win, tails you lose.

Knight really this screwed up...

[turkeyfeathers]

Some programmer's going to lose their job over this error that resulted in a $440 million loss. If the programmer had done the job properly, Knight would have lost $1 billion and been eligible for a government bailout.

Re:Knight really this screwed up...

[akeeneye]

I was thinking that with the tight market for developers in NYC, rather than getting fired the devs might get fat bonuses for having limited the losses to "only" $440M. But your scenario makes a lot of sense too. With a bailout _everyone_ in the company could have gotten a bonus. So maybe they need higher quality shitty developers there -- experienced architects who can deliver not just fuck-ups, but fully-redundant clustered-fucks designed for scalable failure. If the money's good they'll have my CV by morning.

Re:Knight really this screwed up...

[turkeyfeathers]

So maybe they need higher quality shitty developers there -- experienced architects who can deliver not just fuck-ups, but fully-redundant clustered-fucks designed for scalable failure. If the money's good they'll have my CV by morning.

You say you're qualified and available now... let me guess, you were on the Windows 8 development team?

Re:Knight really this screwed up...

[Anonymous Coward]

Who says the developers worked for the company? Could have been outsourced.

Re:Knight really this screwed up...

[Anonymous Coward]

I wish they had lost $404 million..."Money not found."

It allows firms like GS to drive up

[Anonymous Coward]

common commodity prices like crude oil, foodstuffs, and energy, thus screwing you out of more of your money (remember, we bailed them out so they could screw us over with our own money!)

What's not to like?

Simple solution

[nedlohs]

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.

Re:Simple solution

[gknoy]

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.

Perhaps this is natural to poker culture, but to an outsider I can't help but think that your friends are jerks. :-) Perhaps you weren't playing with friends, which might make it more excusable, but it still seems unnecessarily harsh to say "no, those chips stay" when someone says, "ah, crap, I meant to throw in these instead." (Assuming you caught the mistake when you did it, that is.) Pretty much everyone I'd consider playing cards (or other games) with would notice the outlier and say something like, "Did you mean to bet $100 when the pot's at two dollars?", on the assumption that it was a fumble.

Re:Simple solution

[Anonymous Coward]

But if someone was shorting the stock in knowledge of this event they could have made a load. So perhaps it is not a bug but a feature. The source is proprietary after all.

Re:Simple solution

[Anonymous Coward]

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.

Actually - thats not entirely true. I worked at a financial firm for a while (IT, not as a trader) and it seemed it wasn't too uncommon that 'obviously fat-fingered' orders got cancelled. Like if someone put in an order with an offer price of 100000 for a particular stock trading at 10 dollars. There are certain rules and regulations around it, I think, depending on the particular stock exchange. Also, in almost all cases, there are safeguards (the example I gave probably can't happen as the stock exchanges I was familiar with had safeguards to prevent you from putting in orders that deviate more than x from the current price - but it was just to explain my point).

I never could figure it all out either ... I no longer work in finance.

Re:Simple solution

[Chuckstar]

It didn't say that the do-overs were for Knight. The do-overs might be for some third-parties who blundered into the middle of the fray.

Re:Simple solution

[Anonymous Coward]

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.

The usual meaning of a $2 poker game is that there is a max limit on the size of your bet/raise ($2), so you can't bet $200 even if you wanted to.

No-limit poker or pot-limit poker (where you can bet up to the current amount in the pot) are less common, unless you're playing for much higher stakes, but you wouldn't describe that type of game as a $2 poker game.

Re:Simple solution

[Anonymous Coward]

I don't think the friends are jerks for making the bet stand. They would be jerks if they called, but it's likely that the accidental bet will just pick up the pot.

Re:Simple solution

[CaseCrash]

I assume he was at a casino. And at a casino they will not let you change your bet after placing it. I've seen it happen at a blackjack table where the guy claimed he didn't mean to throw in the $200 (of course this was right after the cards went down, although that does happen fast as shit). Easy mistake but once the bet is in, it's in.

Re:Simple solution

[Your.Master]

You're misreading him. He was limping in $2 at a poker game, not limping in to a $2 poker game. The GP missed a word.

(this sort of confusion is why grammar is important!)

Re:Simple solution

[nedlohs]

It was in a casino. Where the rules are the rules - as they should be when an investment bank buys or sells stocks.

Sure in a friendly game at home you'd expect to say "oops, I'm an idiot" and swap the $100 chips with $1 chips.

Re:Simple solution

[nitehawk214]

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.

Perhaps this is natural to poker culture, but to an outsider I can't help but think that your friends are jerks. :-) Perhaps you weren't playing with friends, which might make it more excusable, but it still seems unnecessarily harsh to say "no, those chips stay" when someone says, "ah, crap, I meant to throw in these instead." (Assuming you caught the mistake when you did it, that is.) Pretty much everyone I'd consider playing cards (or other games) with would notice the outlier and say something like, "Did you mean to bet $100 when the pot's at two dollars?", on the assumption that it was a fumble.

Who said they were his friends?

Re:Simple solution

[nedlohs]

That's the point, they do get do-overs. Which is ridiculous because the rest of us don't. Since they get do-overs they take more risks which screws up the system for everyone else.

If a stock exchange or the trading software has safeguard rules that's a different story - since in that case the offer doesn't hit the exchange.

Re:Simple solution

[nedlohs]

There are usually more no limit tables than limit tables playing at the casinos I go to, so I don't think no-limit is less common.

  And yes "[a] $2 poker game" is ambigious it could be $1/$2 limit or $2/$4 limit or no limit with $2 big blinds (or even if you squint enough no limit with $2 small blinds?) - the context completely resolves the ambiguity though so I didn't see a need to specify.

Re:Simple solution

[HornWumpus]

Only if you got them out of the pot before somebody called you.

Otherwise I throw in $100 chips every hand, and take them back when anybody stays in 'sorry, my mistake, again.' That's obviously an exaggeration but faking a bluff and pulling your money back based on reaction is cheating.

For a truly friendly game it would be more like 'hey, pot limit, there's only $5 out there, you can't raise $100.'

Re:Simple solution

[Rockoon]

The $200 plays because if it didnt, he could use this tactic to gain information without any risk.

Re:Simple solution

[nedlohs]

If you did it more than once clearly it isn't a friendly game and hence "rules are rules" applies (or you are too drunk and shouldn't be playing a "friendly" game still :). If you are cheating it clearly isn't a friendly game.

Re:Simple solution

[HornWumpus]

Every friendly game has winners and losers.

The only way a game is 'friendly enough' is when the stakes are so low that bluffing is impossible. That is not poker. Might as well play 'go fish'.

I don't know how friendly the games you play in are. If someone has a tell do you tell them? Before or after you clean them out?

Re:Simple solution

[nedlohs]

Friendly would be were you let people get away with a few mistakes now and then. Where you are playing more for the fun than the money (of course there has to be money, and it has to be at stakes which aren't trivial or else poker isn't enoyable in the first place).

In a friendly game you probably wouldn't notice their tell in the first place, since you are paying more attention to getting your fair share of the snacks than the other players...

You can have a freidnly game of "go fish" and you can have an unfriendly game of "go fish" too.

Come on folks, smile!

[m.dillon]

This is Karma in action. The little guy gets some payback!

-Matt

A single bug!?

[cptdondo]

You gotta wonder about the stability of the whole banking/investment/trading when a single bug can jack a major exchange around....

Re:A single bug!?

[gl4ss]

a single bug backed with a lot of cash.
that's kind of the limiting factor.

this wasn't just a single bug btw. unless the single bug was turning all safeties and stops off.

They're not do-overs

[Anonymous Coward]

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.

Re:They're not do-overs

[Anonymous Coward]

And when the stock prices returned to normal not long after, every single one of those small traders would have been perfectly fine. The only people this really affected are the giant traders that are trading millions of times a second. At which point, the more damage done to them, the better. Then maybe they'd stop gaming the system. But we all know that will never happen.

Re:They're not do-overs

[sjames]

So you're saying in effect that they're too big to fail?

Just imagine if too big to fail could happen to an assembly line worker. He goes in, screws around for a few hours and then manages to burn the plant to the ground, but he isn't upset because the paychecks will keep coming just the same.

Too bad, so sad..

[n5vb]

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.

Re:Too bad, so sad..

[tekrat]

But... but... you don't UNDERSTAND...
The CEO is part of the 1% and DEMANDS that his losses be subsidized by the "little people" -- I mean, how else is he going to buy that gold plated yacht he had his eyes on earlier this week?

You surely do not expect a 1%'er to actually own up to his own mistakes, and gosh, maybe have to sell his 7 Lamborghinis, his 10-acre Florida Estate, and maybe 3 or 4 of his New York condos to make up that loss? The horror!

He demands a bail out from the American taxpayer. How else can he continue to be a "job creator"?

Who cares?

[Anonymous Coward]

Did this cause any of my limit orders to pay more than I wanted, or sell for less than I wanted?
No.

Did I lose any money?
No.

Did their poor strategy cost them a lot of money?
Yes, but it was completely preventable BY THEM.

I don't see why anyone should care.

Re:Who cares?

[michelcolman]

People with stop orders that got executed might care.

Imagine what it must feel like to make such a bug

[Anonymous Coward]

I wouldn't want to be the developer whose bug caused a loss this big.

Ultimate in computer espionage?

[Anonymous Coward]

Wow, if you wanted to hand a juicy target to the Chinese or anyone else (Iran), here's a big fat target. Anyone know the the EFT systems are air gapped?

trading tax suggest

[m0s3m8n]

I am not a big tax guy, but someone (I don't remember the name) proposed a small tax on a per trade value basis. While this would increase my tax burden somewhat (I am of course an evil republican stock holder) it may also help reign in this high volume microsecond (nano) trading that these large firms use to basically game the system.

Re:trading tax suggest

[Anonymous Coward]

Remember when the income tax was 7%, and only on the highest incomes? What do you think would happen with this tax? How long until it starts creeping up, driving financial transactions offshore, where there is even more opportunity for shenanigans? This would be really bad for US capital markets. High frequency trading may create problems here and there, but nothing like the damage a transaction tax would cause.

Re:trading tax suggest

[0123456]

Don't worry, someone will be along in a second to tell you that the slippery slope is a logical fallacy, so that could never, ever happen.

Re:trading tax suggest

[BradleyUffner]

Remember when the income tax was 7%, and only on the highest incomes?

No I don't. And I doubt there are many 97 year olds reading slashdot.

Re:trading tax suggest

[Anonymous Coward]

There are already small transaction fees charged by the exchange on each trade.

this high volume microsecond (nano) trading that these large firms use to basically game the system.

I see this idea thrown around a lot, but nobody seems to explain how making a trade every microsecond allows them to "game the system."

Re:trading tax suggest

[cpm99352]

Making a trade every millisecond isn't the issue - instead putting out an order and then cancelling it before it gets executed (in far less than a second) is where gaming occurs.

Re:trading tax suggest

[ceoyoyo]

"Remember when the income tax was 7%"

Remember when most people didn't have sewer service and the US didn't spend more on its military than the rest of the world combined?

"Demand changes?"

[John Hasler]

You couldn't ask for a louder "demand" than a $440M loss.

Oops

[Anonymous Coward]

Somehow, "Oops" doesn't quite cover it.

Why ignore inflation?

[hawguy]

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:Why ignore inflation?

[Anonymous Coward]

US GDP is in BILLIONS not millions.
You are off by a factor of 1000.

Re:Why ignore inflation?

[only_human]

Why ignore inflation? [...] (ignoring adjustments for inflation)"

Re:Why ignore inflation?

[hawguy]

US GDP is in BILLIONS not millions.
You are off by a factor of 1000.

Ahh yes, you're right of course, in my haste to find a historical example, I didn't read the chart carefully enough. Originally I was looking for the market cap of IBM over the years, but was having trouble finding it and I found this GDP chart and completely glossed over the fact that it was in billions, not millions.

Re:Why ignore inflation?

[hawguy]

Why ignore inflation? [...] (ignoring adjustments for inflation)"

Thank you for restating my question without actually answering the question -- my question was why ignore the effects of inflation when it makes a big difference in the scale.

For example, the list of Highest Grossing Films of all time differs considerably depending on whether or not you factor in inflation:

http://en.wikipedia.org/wiki/List_of_highest-grossing_films

Re:Why ignore inflation?

[only_human]

My feeling is that no true comparison can be made because the costs borne by the company making the mistake are only half the equation. The costs borne by stock holders or computer owners are ignored. By scaling the costs to inflation one gets a feeling that a more precise comparison is being made but it ignores the larger impact of the mistakes. There is no simple comparison to be made. It is all bragging rights.

Re:Why ignore inflation?

[glwtta]

Yeah, I thought it was a little odd to essentially say "using numbers that I know are wrong, I've come up with this comparison".

Why is inflation such a difficult concept to grasp? Absolute dollar comparisons are meaningless if they're more than a few years apart.

Moral Hazard

[wren337]

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:Moral Hazard

[alphred]

Dude, it's Wall Street. They don't have to live with consequences.

Re:Moral Hazard

[th1nk]

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:Moral Hazard

[bill_mcgonigle]

Fine, but learn to live with the consequences.

Hey, fella, in these parts profits are privatized and gains are socialized.

Re:Moral Hazard

[michelcolman]

Certainly Knight Capital's trades should not be unwound. I do feel more sympathy for people with stop orders that got executed. That's precisely why I never use stops, but some people swear by them, "for safety". But if you roll back those orders, other people will get stuck with only the wrong half of a smart trade, some may suddenly have a short position and lose money because their lower buy order has been canceled while the sell order remained. Etcetera. I don't know how they handle these things, but I can imagine it gets really messy. I think the best solution is not rolling back any of those trades. Maybe organise some kinde of compensation from Knight Capital for people who lost money with stops (hold them liable for the loss), but don't cancel any trades.

Re:Moral Hazard

[Anonymous Coward]

Yes. The stop loss did exactly what it was supposed to do: it let you exit a volatile market and avoid catastrophic loss. There was no glitch on your end. Your mistake was trusting that a stop loss was some sort of get out of jail free card.

Re:Moral Hazard

[Anonymous Coward]

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?

If you have a stoploss in place that means you are investing on the basis of local stock price fluctuations instead of a thorough assessment of the real value of the stock. You are one of the people whose activities are distorting market prices. If you actually understood the value of the stock and you traded at a certain price you would BUY instead of SELL if the stock fell by 25%. You'd see it as a discount of 25%. If you are just someone trying to profit off of short-term fluctuations then you lose some and you win some and since you aren't really helping anyone else much why should the market be unwound to undo bad decisions that you made?

Re:Moral Hazard

[Anonymous Coward]

Yes, it's a risky investment. That's why you use other investments, such as CD's when you're looking to be risk-averse.

Re:Moral Hazard

[Anonymous Coward]

Yes.

Re:Moral Hazard

[ShanghaiBill]

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.

Re:Moral Hazard

[khallow]

Yes, pretty much the same reasons as the rest. You relied on an algorithm to make lightning trades on your behalf and you got burned.

Re:Moral Hazard

[Anonymous Coward]

If your stock drops in value of %25 in one day, that sound like you picked a risky investment and you believe it is because of that automatic sell. Maybe you shouldn't deal in such risky investments if you can't deal with the consequences.

Re:Moral Hazard

[Anonymous Coward]

Why? because panics happen, because you can't sit there and monitor the news. A stop loss is there... to stop the loss. It allows you to get out of a position if it falls below a certain price. The idea of a stop loss is a good one. Its execution is lackluster, because you will just hit the bid or ask that is currently out there after the stop loss point is passed. So if a stock is trading at 150/150.01, and you have a stop loss at $140, but a crash or panic occurs and now the spread is 100/170, you are going to sell at $100, not $140. You should have put a limit order out there. But in theory its there so you don't have to bolt out of a meeting and call your broker (or log in) just because news broke that the CEO has been embezzling funds for the past 10 years. In most scenarios it works, but in extremely fast markets with wide spreads, it doesn't work as intended.

Re:Moral Hazard

[HornWumpus]

No. They are speculators, not investors. Which means I don't care what happens to them. I lose no sleep if one speculator (HFTer) takes another speculators money.

Re:Moral Hazard

[HornWumpus]

You can't even quote the derp correctly.

Re:Moral Hazard

[sjames]

Yes. Anyone who lost money on that did so because they chose to be in a market that is nothing more than a glorified casino. Their algorithm malfunctioned on them too.

Several someones out there sold their stock at a really good (for them) price in good faith. Now they are to have those deals unwound? What if they already spent the money?

Re:Moral Hazard

[bill_mcgonigle]

You can't even quote the derp correctly.

huh?

Re:Moral Hazard

[Anonymous Coward]

Anyone who doesn't understand why stop-loss orders are used doesn't understand the way the world works, and should not be commenting on those who live in it.

Re:Moral Hazard

[olau]

Perhaps because you're afraid that something really bad happens that changes your assumptions while you look the other way?

Re:Moral Hazard

[HornWumpus]

The derp is 'profits are privatized and losses are socialized.'

Read what you posted.

This is why...

[Dan East]

This is exactly why I prefer writing games that sell for 99 cents on iTunes over writing either financial or healthcare (which I did for years) software. Much more fun, and more importantly, greatly reduced ramifications if something does go wrong.

Re:This is why...

[michelcolman]

Except if you get to be on the receiving end of a patent claim

we need to do some fixes in the NYSE

[RobertLTux]

Okay if a stock moves over 15% within a couple minutes then that stock should be set to trade at 5 minute intervals for the next 4 hours (so you have to hold the stock for 3:59.00 minutes if you buy it when this trips). Any trading house attempting to trade outside Normal Limits gets put on a 1 hour delay (so they do a trade and it takes 1 hour to commit).

In short subsecond trading should not be able to cause wide swings in values (that multisecond trades can't also do)

Live by the sword...

[Kozz]

... die by the sword, obviously.

But some anonymous soul....

[gestalt_n_pepper]

made a few million dollars in seconds and is very happy - assuming this isn't just some emergent behavior "bug."

Re:But some anonymous soul....

[Anonymous Coward]

Some anonymous CEO perhaps...

Financial terrorism

[Anonymous Coward]

If Iran was responsible it would have been nuked from orbit. Just more US double standards.

Re:Financial terrorism

[Dainsanefh]

The Jews are the one controlling this country's government, from top to bottom, and on both parties.

why not get rid of HFT?

[hawguy]

Why don't exchanges batch up all of the trades received in one second (or 5 or 10 or 60 second) intervals and execute them in random order?

There's no sane reason in a fair market why someone whose computers are located a few milliseconds (or nanoseconds) closer to the exchange should get his trades served before the guy who lives a bit farther away and is constrained by the speed of light.

Does HFT help the markets in any way?

Though I guess one benefit side effect of high frequency trading is that it'll help drive science since they'll be the first in line to pay for quantum entanglement enabled communication to get instantaneous data transfer.

Re:why not get rid of HFT?

[gl4ss]

I've said it before and I'll say it again.

they don't get rid of it because it benefits the exchanges, the exchanges get to act as gatekeepers to the hubs with lowest latencies - you can bet that access isn't cheap. so the exchanges(and people associated with them) profit from the current system.

the fix is so easy and simple that you're not the only one who has thought about it. in fact in some trade like systems it's normally used(like pretty much all sports etc betting online systems).

Re:why not get rid of HFT?

[hawguy]

I've said it before and I'll say it again.

they don't get rid of it because it benefits the exchanges, the exchanges get to act as gatekeepers to the hubs with lowest latencies - you can bet that access isn't cheap. so the exchanges(and people associated with them) profit from the current system.

the fix is so easy and simple that you're not the only one who has thought about it. in fact in some trade like systems it's normally used(like pretty much all sports etc betting online systems).

I think it warrants repeating.

If only there were an agency that could regulate markets in the USA. Maybe some agency with a mission statement like this:

The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.

I still fail to see how giving preference to investors that are physically located closer to markets is "fair".

Re:why not get rid of HFT?

[m.dillon]

The reason is that the exchanges get quite a bit of revenue offering these direct-connect services to the HFTs. Basically it's a backdoor way of stealing revenue from the real market makers. The HFTs steal the revenue from the real market markers by interposing themselves in the middle of many of the transactions (thereby getting the market making fee from the exchange), and then turn around and pay the exchanges a fee for the privilages. Thus the exchanges are able to offer the market making fee but get quite a lot of it back in the fees from the HFTs.

It's obvious to anyone with a brain that HFTs do not add any liquidity to the market. I mean, come on, how stupid are we? A small company worth $100M-$1B doing high frequency trading is not going to add any liquidity to the market. All they do is add phantom volume that looks like liquidity right up the moment where a real event happens, then it disappears, PUFF, just like that.

It comes down to the idiot regulators just not caring about making the markets fair to everyone.

In some sense this has been hurting the exchanges too, as the larger players have slowly pulled their trading out of the public exchanges and into dark pool exchanges that don't play the same games. The public exchanges will still be closely priced to the dark pool exchanges due to arbitrage, but retail investors definitely get the short end of the stick in this new reality. That isn't the real problem... the real problem is that the HFTs add so much noise to the system (literally their entire M.O. is to try to force the exchanges to lag other players) that it can result in excessive volatility and screw up price discovery to the HFT's advantage.

Another reality, however, is that market making margins have gone down to $0.01 over the last decade. Before the exchanges went to the decimal system the middle men were pulling down much more revenue... higher margins. This is a huge benefit to the retail investor regardless of the other shenanigans going on. But the psychology is such that it gets lost in the wind when investors and traders see specific participants being given an unfair, leg-up advantage.

-Matt

Re:why not get rid of HFT?

[the eric conspiracy]

The problem is that the SEC has never been particularly good at performing their mission.

IMHO they should torch the whole organization and rebuild it from the ground up.

Yes, The Jewish Bankers

[Dainsanefh]

bite the dust!

Canceled trades

[Anonymous Coward]

The NYT link for the claim that NYSE "canceled some of the trades" makes no mention of any cancellations. Sounds like these were matter-of-course cancellations -- stocks whose prices swung more than 30% were subject to the canceled trades. Sadly, details about how the cancellations were done are not widely available in the press, so it is unclear whether these cancellations constitute corporate favoritism.

Re:Canceled trades

[cpm99352]

Cancellation followed NYSE rules about trades involving movement over 30% (see announcement in the link at 14:57 ET 01 Aug 2012). Press coverage of this issue has, unsurprisingly, been abysmal. Even WSJ was downplaying it yesterday.

http://markets.nyx.com/nyse/trader-updates/view/11183

"Trades executed 30% or more above or below the NYSE/NYSE MKT opening price today between 09:30:00 a.m. and 10:15:00 a.m. ET will be busted."

Given that there were probably more significant losses in Pepsi, Wells Fargo, etc., it appears NYSE was actually following the rules.

On another topic, given MF Global and the other one, hopefully the cash at Knight (especially that owned by the pensions) is being very carefully monitored.

Teaches em Right

[Anonymous Coward]

Us regular folk don't get to trade on the millisecond, hopefully Knight's loss helped balance that scale a little bit.

How many times they have made profits?

[140Mandak262Jamuna]

Is it possible at least some companies have money due to bugs? Even in this case, it is a zero sum game. Every trade has a counter party. So some group of traders collectively made 440 million due to this bug. If there is any reason to ban such high frequency algorithmic trading this is it. How long will it be before the programmers who are familiar with the behavior of the code in simulations, use their knowledge of bugs and failure modes, and collude with the counter parties to profit? How do we know it is not already happening?

Have at me! :-(

[Impy the Impiuos Imp]

> Algorithmic trading glitch costs firm $440 million

Algorithmic trading glitch dumps $440 million into someone else's pocket.

Live by the sword, die by the sword.

HFT for dummies

[ShanghaiBill]

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.

Re:HFT for dummies

[alexander_686]

To extend, 20 years ago the middle men were a few firms or, for the NYSE, a single firm. The bid / ask spread was around 12.5 to 25 cents. This was the mark up the middle men were making and it was basically risk free. And if you put in a big order they would gauge you – you did not have that many options.

Today the bid / ask spread is a fraction of a penny. You can put in larger orders without having the market move against you.

I have heard the argument, and I tend to believe it , that this rapid trading has made the market more volatile in the short run. The middle men would eat their free lunch but would tend to even out the high and lows of the market.

Re:HFT for dummies

[makomk]

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

[infodragon]

To expand on your post...

HFT has improved market stability. Specifically look at "Largest percentage changes"

http://en.wikipedia.org/wiki/List_of_largest_daily_changes_in_the_Dow_Jones_Industrial_Average

To expand a bit further the largest daily percentage losses in almost 25 years happened in 2008, which happens to be the 9th biggest fall in the market. So out of the top 10 worst days of the market only one has happened since the advent of HFT.

I had the privilege to see this presentation in person and it makes quite a bit of sense.
http://www.orie.cornell.edu/engineering2/customcf/iws_events_calendar/files/cfem_20120314_0.pdf

To expand further upon a positive of HFT the observation of the market for micro infrasturcthre changes which can help exchanges to mitigate issues with HFT please read up on this.

http://www.stern.nyu.edu/cons/groups/content/documents/webasset/con_035928.pdf

Hope this helps.

Re:HFT for dummies

[Anonymous Coward]

"Other than people ranting about something they have made no effort whatsoever to understand,"

That includes you too.

Re:HFT for dummies

[Anonymous Coward]

I'm going to try to arrange the argument against HFT without necessarily agreeing to it, because I'm still deciding myself.

I think the problem is a perceived imbalance: our economic system is causing a lot of resources to be poured into this problem that seems to provide extremely little social benefit. It's essentially a sore point in the arguments for capitalism* over alternative economic systems -- one of the arguments for (current implementations of) capitalism* has long been that it's had historically better results than other economic systems for the population at large, even though unlike, say, communist-socialism command economies, it's not specifically designed to achieve results for the masses. Here we have a side-effect that seems to be a net loss for society. So people on slashdot try to brainstorm ways that we could reallocate human effort and resources away from this seemingly meaningless artifact of capitalism toward.

It's kind of like how bitcoin mining is literally pointless make-work, yet people were paying money for video cards and electricity -- using up real resources and capital -- to get pretend money because the bitcoin system made it profitable (for a time).

The difference, of course, is where bitcoin mining doesn't seem to have beneficial side-effects vs. just seeding the market with bitcoins to people who *could have* done bitcoin mining but didn't (eg. having the make-work computer time actually do distributed protein folding problems or something), there is a liquidity argument to HFT.

So slashdotters brainstorm alternative solutions. Eg. what if there were X many intervals in a day (eg. X = 8 hours / 1 second = 28800, or whatever), and you get one trade per interval, revealed to all simultaneously at the end of the interval. Your counter was that increases the probability of being nailed by a cancel by X / [highest possible frequency]. An easy response is, okay, let's say the cancels can't be executed more than once per interval either, and all cancels execute after trades (or, almost as good, cancels can only fire every second interval). Now there is 0 possibility at all of the buyer cancelling because they already have the contract.

Now a counter to that might be that it is for some reason unreasonable to limit cancelling -- maybe the interval is an hour and a statistically significant number of buyers go bankrupt in an hour; maybe there's something else about the financial markets that I don't know about.

* Here I mean current implementations of capitalism. I'm aware that it's not pure capitalism and I'd be opposed to pure capitalism myself;

Re:HFT for dummies

[cpm99352]

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

[ceoyoyo]

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

[michelcolman]

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.

Except those who got their trades reversed. Imagine seeing a stock plummet from 10 to 5, buying at 5, selling when it gets back to 8. The stock then continues back up to 10, and a few days later you get a message... that buy at 5 was canceled and you are now short at 8 while the stock is at 10!

Re:HFT for dummies

[johnjaydk]

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

[ceoyoyo]

"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.

Re:HFT for dummies

[citylivin]

"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"

So what value are they adding? Seems like you are describing a useless middleman which uses computers and enormous wealth to stand in the way of two parties negotiating on a price. The middleman does not intend to invest in the company that they are trading, they are just skimming off the top. This drives up the price for everyone, and makes money for the middleman. Why is the exchange itself not matching up buyers with sellers? why do we need these third party traders doing it? Surely a computer can take a sell price and match it up with someone who wants to buy it. Why have the middlemen artificially inflating the price automatically? You seem to be saying that these people should not have to incur any risk in that 1 or 10 seconds. Why? they are gambling with no risk, if their trades always go through and they always inflate the prices people pay, and rip off the sellers.

Sounds like common sense to me. Society as a whole should be working to eliminate middlemen, people which add no value. Why by a car from a dealership when you can order it on the internet for a fair price (the same as everyone else would pay) with no negotiation required.

Re:HFT for dummies

[Anonymous Coward]

Thank you for this common sense description of HFT.

One more question I've have regarding HFT: if the same companies who have HFT groups also have human customers, is there any reason to believe they are not feeding pre-executed buy/sell orders to their HFT software, and/or intentionally adding a 0.5sec delay to regular transactions to boost their HFT margins. To a normal person this might seem like insider trading (using non public knowledge to trade at an advantage), but I can see a trader claiming this is just a innate benefit of HFT.

One has to wonder if someone could write an HFT to game other HFTs, causing something like what we just saw.

Re:HFT for dummies

[HeckRuler]

Wow "market makers". That makes total sense. They connect buyers with sellers.
Gee, if only there was a place people could go to post what they wish to buy and/or sell without some asshat in the middle eating their lunch?

Re:HFT for dummies

[rundgong]

... they are market makers. They find a willing buyer and a willing seller ...

Then they are not making any markets. It's not like the real buyer and seller wouldn't find each other if the HFT was not there. It's just that they would find each other a millisecond later.
All they do here is steal some profit from the real investors. If the buyer is willing to buy at 3 and the seller is willing to sell at 1, they should meet at 2. Not give the difference to the man in the middle who happened to have a shorter network cable in the stock exchange server room.

Since the introduction of high frequency trading, transaction costs have fallen considerably, saving plenty of people a lot of money.

I would say you have confused correlation for causation.
Computers getting faster and cheaper have made transaction costs go down. HFT just happened to grow big at the same time.

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.

Thats exactly what I was thinking about people arguing for it. I have never heard a single good argument for it.
The real investors don't benefit, and the companies don't benefit either. But hey, the man in the middle makes a fortune until he crashes the market, so that's gotta be worth it, right?

HFT was originally blamed for the 2010 "flash crash" but the full investigation found that HFTing actually made is less severe.

I have never heard of this before, but I am very interested in a citation so I can read more about it

Re:HFT for dummies

[infodragon]

This was a point to indicate, not to unequivocally conclude the matter. As has been stated the flash crash was mitigated by HFT not caused. I was just adding to the discussion and pointing to something the GP was asking for.

I also back up my claims by peer reviewed published research in which the use of HFT mechanisms can and do stabilize the market. Please read the pdf on VPIN. The slide show is also very informative.

Re:HFT for dummies

[cpm99352]

I read the PDF, and it does not appear to discuss the current behavior of HFT algos cancelling their trade microseconds after they have placed it, in violation of SEC rules.

This cancellation is extremely unfair to human traders.

Re:HFT for dummies

[infodragon]

Was it far that in 1850s only a limited number of investors had access to telegraphy? The telephone? radio? All of these allowed the same behavior and disadvantaged others who did not have it. WHY is this now different?

Violation of SEC rules needs to be prosecuted. But the SEC never prosecutes, except in extremely rare cases. That is an entirely different issue unrelated to HFT and unfortunately must be handled in the lowest frequency method known to man, politics.

Re:HFT for dummies

[Anonymous Coward]

If you look at the complex patterns of input this HFT is distorting the actual market. The supposedly level trading field gets skewed. Only those who can place their servers close to the exchange server are in a position to profit. HFT is a combination of insider trading (through exploiting the time delay advantage) and market manipulation. However the US political system has been corrupted to such extent that no regulator is worth its name. That excuse of providing liquidity is BS.
Lower fees are a consequence of higher trading volumes and more competition between exchanges which has forced some consolidation.

Re:HFT for dummies

[ShanghaiBill]

until you realize that the HFT is just playing the part of a middleman, adding, well, no value to the exchange.

You are assuming that finding a buyer, negotiating a price, exchanging the stock, and ensuring payment are things that have no value. If that was true, no one would use HFTs (or stock exchanges) and we would all trade stocks through ads on Craigslist.

Many big traders do bypass the exchanges by using dark pools, but others are better off using the services providing by a middleman, and, by reducing their risks, HFTs provide those services more efficiently than anyone else, and can therefore offer a better deal to both the buyer and the seller than they can get anywhere else. If they didn't, no one would buy from them or sell to them.

Re:HFT for dummies

[z4ce]

So here is the argument I've heard against HFTs: in most circumstances the buyer and seller would have found each and exchanged peer-to-peer less than a second later if the HFT didn't see the order and intercept it first.

This seems to be backed up by the fact they seem to purchase special data feeds from the market that gives them an earlier peek at the data than everyone else. When an HFT works between different exchanges to execute a trade, I can't see why anyone would see a downside.

Is there some value-add step I am missing there?

Re:HFT for dummies

[Anonymous Coward]

I can tell you two things wrong with it.

With required network SLAs in single milliseconds, there is no real authentication, no authorization, and... well, anything that a secure network transaction would entail. Put your engineer hat on, look at the minimum time that specific things take, and then look at the very long list of things that must not be present.

That's one thing wrong with HFT. Might as well make the floor's SSID, "free public wifi", and these HFT guys are driving it, damn the costs (since those costs are largely going to be suffered by everyone else).

The second thing wrong with HFT is that the exchange itself is such a boys-club that it would allow the above setup to occur, damn the costs of being wrong.

Re:HFT for dummies

[cpm99352]

I'll repeat myself again - this is different because there is no expectation of actually completing the order on the part of the HFT algo. In the days of the telegraph, etc., the orders were placed with the expectation of them actually going through.

As a counter-example, what is the downside of forcing a trade to be open for five seconds before it can be cancelled?

Re:HFT for dummies

[Anonymous Coward]

. WHY is this now different?

Because it's "on a computer." Naturally. The same reason slashdotters love to slag on politicians and clueless patent trolls over.

Re:HFT for dummies

[sjames]

Imagine If I walked around the grocery store and every time someone went to take something off the shelf I knocked them down and cleared the shelf. After they leave in frustration, I sell them what they wanted for a slightly higher price. If they say no, I toss the food back on the shelves and tell the grocer "just kidding!". I am a high speed grocery trader!

For some reason, the cops don't arrest me. Perhaps because they know that if they look the other way, I might hire them for more than they will ever make as a cop.

Re:HFT for dummies

[sjames]

Give it time. Your argument is essentially that 2013 year model cars are much safer than 2012 because so far only one person has died in a 2013 model car.

Meanwhile, they certainly do seem to happen an awful lot now that we have HFT. Only 2 days in the '90s made the list and only 1 in the '80s. They also seem to be bigger losses in the 2000's than the '80s or '90s.

Re:HFT for dummies

[ceoyoyo]

And I was pointing out that that statement doesn't support your conclusion and is misleading. Regardless of how sound the rest of your argument is, that point weakens it.

Re:HFT for dummies

[Anonymous Coward]

HFT and abstraction allow the insertion of an effectively infinite number of middlemen, and in so doing, extract the entirety of the profit curve from any business traded on the market. Eventually leading to the destruction of the set of businesses involved in the making of actual products, as they'll have no profits to speak of.

Re:HFT for dummies

[Anonymous Coward]

No one is forcing you to go through the "middleman"; if you're looking to buy and you can find someone who's willing to sell the stock for less than these "middlemen" you're talking about, then trade with them instead.

Re:HFT for dummies

[olau]

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.

Could you please explain how that happens? You are not describing the stock exchanges I have used. In there, you either post an offer or is being matched with an existing offer. A HFT will only have a chance if can offer me a better price than everyone else.

As I understand things, market making generally lowers the spread, which is bad if you're trying to use an illiquid market to gain a price more advantageous than what would be fair was the market more liquid.

Re:HFT for dummies

[olau]

Why is the exchange itself not matching up buyers with sellers? why do we need these third party traders doing it?

While I am no expert on how exactly various algorithms earn money, it's my impression that some algorithms can make money by smoothing out differences between different markets (stock exchanges are much worse connected than you'd think in today's world, e.g. from my local Danish bank I can't invest online in American stock exchanges, only the Danish one), but market making generally involves risks since you buy something, hold on to it and hope to sell it for more when a new buyer shows up later. If the market falls, you're in trouble. That's why you don't want the stock exchange to do it.

If you think a market maker is a useless middle man, then think of the case where you want to buy something, but nobody wants to sell. Either you pay a big premium, or you rejoice because a market maker is willing to sell at a small premium because they bought up some stock earlier at a small discount. The loser here is the guy who could have sold to you at a big premium, taking advantage of the illiquidity. Thus you benefited and so did the guy who sold the market maker the stock because he didn't have to either wait for his sale or sell at a huge discount. And if anyone was willing to pay a better price than the market maker at the time, he could have sold to him instead.

You certainly want algorithms to do market marking - there's just very little point in having a human monitor the value and putting in orders, it just raises the spread necessary to pay for that guy. Instead various companies can put up algorithms, compete and lower the spread even further.

I think the high-frequency aspect is silly too, but I haven't heard any credible cases yet where someone who is not taking advantage of another party actually loses money. And I think the millisecond aspect of it is more about beating the other HFT algorithms to the punch rather than stealing deals from humans.

Re:HFT for dummies

[olau]

If the buyer is willing to buy at 3 and the seller is willing to sell at 1, they should meet at 2.

And this happens exactly how? They start negotiating over a cigar and a bottle of rum? Have you ever actually tried this?

With a stock exchange, what happens here is that either the buyer comes first in which case the seller sees his offer and sells for 3, or the seller comes first so the buyer sees his offer and buys for 1 (subtracted trading fees of course). They will never meet at 2. So that's why one of those poor sods will always come out with -1 while the other gets +1 compared to the average.

If you add a market maker, you might have the market maker buying at 1.99 and selling at 2.01. In this case whoever comes first, unless they accept a worse deal than the market maker is offering, both will come out with -0.01 compared to the average.

Now realize that the guy with the advantage here will usually be a big bank or investment company who has a much better idea of what happening in the market, and I would gladly take the -0.01 hit any day compared to the risk of the -1.

Re:HFT for dummies

[Anonymous Coward]

I used to work for an algo-trader, and I can tell you with absolute certainty that the exchanges take a very dim view of the "order/cancel" scenario you suggest. Exchanges can, and do, fine market players for violation of their rules. The company I used to work for was trying to stay on the "nice" side of the system, and so was super-paranoid about any hint of unrest from any of the dozens of exchanges they used to trade on. You may argue that the fines aren't big enough, but they're scary enough that you don't want one. Further more, if you annoy an exchange long enough, they'll just cut you off altogether, which you definitely don't want.

Re:HFT for dummies

[Anonymous Coward]

I used to work at an algo-trader. I'm by no means an authority, but I'd love to know what these queue jumping orders are? I'm aware of market orders, limit orders, IOC, iceberg, and a few others. None of which "jump any queues". Indeed, what is the queue of which you speak?

It's pretty simple - there are a bunch of orders on the market. If any match, the exchange matches them and they disappear from the market. There are entirely valid reasons why you might put an order out that's current-price-plus-$10. If the price moves, you cancel and re-order at $10 above the new price. That behaviour is part of being a market maker - you're obliged to keep valid orders on the market at all times.

Back to the queue... I'm not sure what queue you think there is. Let's say you and I both get a price tick on our Bloomberg terminal that says someone is offering 100 facebook shares at $10. We both decide to buy, so both prepare and send an order. I'm a quicker typist, so my order arrives at the exchange first, so I get the fill and you don't. That's about it. You didn't miss out because I was first in any queue - you missed out because your order arrived at the exchange after mine did.

As for investment and 401K and so on (I'm British, so we have a different system, but they're broadly similar). The thing is, investment takes a long time. If it doesn't, then all you're doing is speculating, and that's an entirely different beast, roughly akin to gambling. Investment is giving a company your money and then doing what you can to ensure that company performs as you think they should so that your investment grows. I'll bet that just about no one (statistically) has ever been to an AGM for any company in their pension pot, even though they're entitled to do so. Are those people "investing"? No, they're sitting back and hoping the money comes rolling in. Well, guess what... you don't have a right to make money on your "investments", you have to work for them like everyone else. You don't need sub-millisecond ordering, or exchange co-located machines to invest. You need time, money and patience.

Re:HFT for dummies

[Anonymous Coward]

No. A market maker is *legally obligated* to always be willing to buy or sell. These are not "fake" trades, it's what they are supposed to be doing.

Re:HFT for dummies

[ceoyoyo]

If you want to buy a stock you say "I'd like this many shares of this stock, and I'll pay up to this much." Someone else, who has that stock, says "I'd like to sell so many shares of this stock, but I want at least this price for them. Technology is more than good enough to match up the buyer and the seller. BUT, in the current system, if you have a privileged connection and can slip in faster than everyone else you can buy from the seller and sell to the buyer before they know about each other.

It used to be that you'd telegraph (or mail) your order into a brokerage and they'd send it down to someone on the floor who would physically bid on stocks. THOSE guys were still middlemen, but necessary. I have yet to see good evidence that modern HFTs are anything other than parasites. The liquidity explanations seem to depend on technological barriers that are no longer in effect, and arguing that a reduction in order fulfillment time is always good, whether it's a reduction from days to minutes or milliseconds to nanoseconds.

#1 rule of investing

[buck-yar]

Don't trade with money you can't afford to lose.

Apparently they can afford to lose $440million.

Not a single f was given this day.

Can you not make every other word a link?

[Spy Handler]

Because having too many links in one paragraph is both visually annoying and just plain fucking stupid.

like most problems

[ILongForDarkness]

The bug could have had less affects if the operators actually used their minds like set a limit on number of transactions allowed per day. Or, this will blow high speed traders minds, actually hold securities for weeks/months/years and issue transactions recommended by the software by using real people. Maybe it is the value investor in me showing, but in my mind if your investment strategy isn't "this is a great company to own" but instead is "I think I can sell this to another sucker for more even though I have no clue if the company is good" you have a problem.

Automatic Trading should be Throttled

[sycodon]

This is like driving on the freeway at 150mph on non-VR tires. While they may not blow, it is inevitable that they will and the results at that speed will not be pretty.

Re:Automatic Trading should be Throttled

[th1nk]

While they may not blow, it is inevitable that they will

Well, which is it?

Re:Automatic Trading should be Throttled

[sycodon]

^in any particular run.

Fixed.

Can I blame auto correction?

Re:Automatic Trading should be Throttled

[crazyjj]

The new HAL 9500D will make you rich, and poor again, and rich again...and all in less than 4.2 milliseconds.

Re:Automatic Trading should be Throttled

[dna_(c)(tm)(r)]

While they may not blow, it is inevitable that they will

Well, which is it?

Schrödinger's tyres. And Heisenberg was at the wheel - although nobody is certain about that either.

"Rogue algorithm" my ass

[GodfatherofSoul]

It becomes "rogue" when someone's flash trading scheme starts losing a shitload of money. Classic case where government has to come in and regulate. These traders will destroy themselves and the economy if left to their own devices; and if operating under the assumption that Daddy will come in and fix things if they screw up too big.

Data Monitoring

[rotenberry]

Back in the 1990s I worked as a software developer at a company that monitored a large amount of data in real time. Not stock market data or particle accelerator data, but telephone switching data (SS7). They began selling the hardware/software package in the late 1980s.

If this amount of data can be monitored and displayed in real time using 1980s technology, why can't the SEC do it now for stock market data?

Re:Data Monitoring

[mcmonkey]

Back in the 1990s I worked as a software developer at a company that monitored a large amount of data in real time. Not stock market data or particle accelerator data, but telephone switching data (SS7). They began selling the hardware/software package in the late 1980s.

If this amount of data can be monitored and displayed in real time using 1980s technology, why can't the SEC do it now for stock market data?

For the same reason every ATM and card reader at the gas pump has a printer, but there's no way for a digital voting machine to give you a hard copy record of your vote.

Re:Data Monitoring

[the eric conspiracy]

Because the phone company used to be clueful about such things.

Is this any loss to the economy?

[timeOday]

I can see where this is a huge loss to the company involved, but it seems like a zero-sum game, in which case there would be no loss to the economy overall... other parties got some stocks on sale. Same goes for JP Morgan losing almost $6 BN (by letting the "London Whale" run amok).

Contrast this to a very similar sized loss suffered by the Navy (or a shipyard insurance company?) when a guy got depressed and set a nuclear sub on fire the other day to get out of work... it is much easier for me to see a real loss in that case.

Re:Is this any loss to the economy?

[ceoyoyo]

It's not. Some people's retirement savings might have taken a hit, unless their pension funds were properly distributed among several companies.

Knight itself might have trouble getting customers.

I wonder though... do you suppose these companies patch their software regularly? If they do, shorting them the day before patch days might be an excellent investment.

Re:Is this any loss to the economy?

[timeOday]

I wonder though... do you suppose these companies patch their software regularly? If they do, shorting them the day before patch days might be an excellent investment.

I'm no expert but it seems like they're very secretive, which is a generalized defense against being targeted in any way like that. Also it seems to me you have to have a huge amount of capital to spread your bets to profit from rare, unpredictable events, much like an insurance company in reverse.

Re:Is this any loss to the economy?

[ceoyoyo]

Yes, they probably spread their updates randomly. On the other hand, from this story they don't appear to be the sharpest tools in the shed.

No, you wouldn't necessarily need a huge amount of capital. Short term and random investing against a financial services company shouldn't be overly risky. Their stock is unlikely to shoot up suddenly. And these events don't seem to be all that rare. It seems like there are usually two or three a year.

It's kind of a Schrodinger thing

[publiclurker]

the tires are both blown and not blown until you actually try it.

Re:It's kind of a Schrodinger thing

[Anonymous Coward]

Whoah, man. It's like my mind is both blown *AND* not blown at the same time, dude.

And just how big of a transaction fee...

[publiclurker]

Do you think Goldman Sachs pays themselves?

Re:And just how big of a transaction fee...

[tolkienfan]

Why does Goldman come up every time HFT comes up?
Goldman has a reputation for hard selling (advising to buy) instruments to its customers that it wants to get rid of due to being considered toxic. Such as the cdos.
Those practices are deplorable.
But HFT is, overall, beneficial to investors, traders and the market as a whole.

Re:And just how big of a transaction fee...

[Stuarticus]

Yes, this incident and the flash crash look to have been very beneficial.

bad algorithm ran 30 minutes without notice

[peter303]

Non-Kinght people noticed the huge volume increase on the NYSE, but not the Knight people, Maybe they gave the job to a summer intern.

It's not real investing anymore

[ilsaloving]

It's Robot Unicorn Attack for spoiled self-entitled jerks who have more money than they should.

Dev cop-out

[Anonymous Coward]

"Worked on my dev box..."

Craps!

[Anonymous Coward]

Wow, I thought I was crazy trying to make money by throw a pair of dice.

With the sub-millisecond needs, this is plain overkill. Gamble away my friends.

A simple fix.

[Anonymous Coward]

New rule: any share of any stock must be owned by a single person and cannot be owned THROUGH others, and after purchase shall belong exclusively to the person who bought it until sold. Any share can only be sold ONCE PER DAY. Every share shall have a unique serial number, and THAT share shall bear with it a history of every person who ever owned it.

No more margins, derivatives, bundled-this or junk-that. What a glorious day that would be...

This was not algorithmic trading.

[JazzHarper]

Contrary to TFS, Knight was not running algorithmic trading. They are a "market maker" for retail brokerages, like Fidelity, Vanguard, E-Trade and, in particular, Scottrade. (About 40% of Scottrade's traffic was going through Knight). The NYSE had just brought a new retail trading interface on-line, and Knight's software did not conform correctly to the protocol. As a result, it kept re-entering the same orders, over and over. These were small retail orders, just a few hundred shares each, but they were submitted to the exchange thousands of times.

The two outstanding questions are: Why was their interface not tested properly and why did it take them over 30 minutes to pull the plug?

Re:This was not algorithmic trading.

[Anonymous Coward]

Whats your source for that info? Work in the industry, or published source? Just curious, because I do, but no one seems to know exactly what happened.

Missing Keyword

[Mana Mana]

measuretwicetradeonce

Nanex: Knightmare on Wall Street

[arunkv]

It is surprising that the best article on KCG's trades was not shared yet. Check out http://www.nanex.net/aqck2/3522.html for a fascinating look at the trades. Chart 3 shows a millisecond interval chart with around 40 trades happening in under a second, each buying at the offer and immediately selling at the bid. As Nanex put it "you now have a system that's very efficient at burning money".

Solution

[NewYork]

https://en.wikipedia.org/wiki/Information_asymmetry#Adverse_selection has solution to this menace.

Zero sum implications

[WinstonWolfIT]

If Knight took it in the chin, who were the winners?

WhiteHouse.gov Petition

[Anonymous Coward]

First, let me state that I've created a petition for the Whitehouse with respect to this article:

Specifically, Knight Capital Group was operating a High-Frequency Trading algorithm (HFT), which, due to a purported bug, incurred large losses on Wednesday morning, August 1st, 2012. These losses were to the tune of 440 million. The NYSE Euronext (operator of the New York Stock Exchange) has agreed to cancel trades for everyone on on the six out of the 150 stocks for which Knight's HFT algorithm operated during the times of 9:30 to 10:15 am (ET). These trades are canceled for Knight, which lost money, as well as any other trader (large or small), which lost or made money (according to WSJ, possible paywall, link http://blogs.wsj.com/marketbeat/2012/08/01/nyse-to-cancel-trades-in-six-stocks-after-trading-snafu/).

While it may be true that Knight's HFT changed the value of those six stocks during that interval of time, any trade in fact, by individual or institution, will affect the value of any stock. The magnitude of those changes were larger than that which could be done by an individual, because Knight is an institution with a large market position and HFT technology. However, canceling trades because a large institution inccured a loss is, simply put, preferential treatment. In contrast, if their HFT technology had netted Knight 440 million that day, the NYSE Euronext would not be cancelling any trades.

It is my contention that any individual or institution who runs high-frequency trading programs cannot be allowed to keep winnings and then *also* be forgiven any losses. To give such perferential treatment is to violate the free-market assumptions of a fair exchange. It is already unfair that firms with HFT algorithms are given preferential information (e.g., the ability to see individual non-HFT trades before they are active), which alows them to make money in arbitrage positions. If HFT firms are given preferential treatment based upon outcome, then the markets are truely no longer fair.

Link to Petition:
https://petitions.whitehouse.gov/petition/address-preferential-treatment-stock-exchanges-supporting-high-frequency-trading-hft-over/Bm45mL2V

Whitehouse Gov Petition

[Anonymous Coward]

First, let me state that I've created a petition for the Whitehouse with respect to this article:

Specifically, Knight Capital Group was operating a High-Frequency Trading algorithm (HFT), which, due to a purported bug, incurred large losses on Wednesday morning, August 1st, 2012. These losses were to the tune of 440 million. The NYSE Euronext (operator of the New York Stock Exchange) has agreed to cancel trades for everyone on on the six out of the 150 stocks for which Knight's HFT algorithm operated during the times of 9:30 to 10:15 am (ET). These trades are canceled for Knight, which lost money, as well as any other trader (large or small), which lost or made money (according to WSJ, possible paywall, link http://blogs.wsj.com/marketbeat/2012/08/01/nyse-to-cancel-trades-in-six-stocks-after-trading-snafu/).

While it may be true that Knight's HFT changed the value of those six stocks during that interval of time, any trade in fact, by individual or institution, will affect the value of any stock. The magnitude of those changes were larger than that which could be done by an individual, because Knight is an institution with a large market position and HFT technology. However, canceling trades because a large institution inccured a loss is, simply put, preferential treatment. In contrast, if their HFT technology had netted Knight 440 million that day, the NYSE Euronext would not be cancelling any trades.

It is my contention that any individual or institution who runs high-frequency trading programs cannot be allowed to keep winnings and then *also* be forgiven any losses. To give such perferential treatment is to violate the free-market assumptions of a fair exchange. It is already unfair that firms with HFT algorithms are given preferential information (e.g., the ability to see individual non-HFT trades before they are active), which alows them to make money in arbitrage positions. If HFT firms are given preferential treatment based upon outcome, then the markets are truely no longer fair.

Link to Petition:
https://petitions.whitehouse.gov/petition/address-preferential-treatment-stock-exchanges-supporting-high-frequency-trading-hft-over/Bm45mL2V

Re-posting to attach Slashdot ID.