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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)."

3 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

    --
    This space for rent.
  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.