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Algorithmic Trading Glitch Costs Firm $440 Million

Posted by Unknown on from the someone-got-fired dept.

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)."

8 of 377 comments (clear)

  1. Visual walkthrough and commentary of the mayhem by recoiledsnake · · Score: 5, Interesting

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

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    This space for rent.
    1. Re:Visual walkthrough and commentary of the mayhem by fuzzyfuzzyfungus · · Score: 4, Interesting

      This feature is by design.

    2. Re:Visual walkthrough and commentary of the mayhem by HeckRuler · · Score: 4, Interesting

      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)

  2. Defend flash trading? by Kelbear · · Score: 5, Interesting

    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?

    1. Re:Defend flash trading? by cp5i6 · · Score: 5, Interesting

      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.

  3. Too bad by sanosuke001 · · Score: 4, Interesting

    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.

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    -SaNo
  4. Re:HFT for dummies by rundgong · · Score: 4, Interesting

    ... 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

  5. Re:HFT for dummies by sjames · · Score: 4, Interesting

    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.