Algorithmic Trading Glitch Costs Firm $440 Million

Visual walkthrough and commentary of the mayhem by recoiledsnake · 2012-08-02 04:50 · Score: 5, Interesting

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

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Re:Visual walkthrough and commentary of the mayhem by Anonymous Coward · 2012-08-02 04:58 · Score: 5, Insightful

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 by fuzzyfuzzyfungus · 2012-08-02 05:02 · Score: 4, Interesting

This feature is by design.
Re:Visual walkthrough and commentary of the mayhem by GameboyRMH · 2012-08-02 05:26 · Score: 4, Funny

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.

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"When information is power, privacy is freedom" - Jah-Wren Ryel
Re:Visual walkthrough and commentary of the mayhem by 0123456 · 2012-08-02 05:47 · Score: 3, Interesting

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 by Anonymous Coward · 2012-08-02 05:50 · Score: 2, Informative

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 by alexander_686 · 2012-08-02 06:18 · Score: 5, Informative

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 by Imrik · 2012-08-02 07:25 · Score: 2

Now compare their children.
Re:Visual walkthrough and commentary of the mayhem by HeckRuler · 2012-08-02 07:35 · 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)
Re:Visual walkthrough and commentary of the mayhem by justforgetme · 2012-08-02 17:39 · Score: 2

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

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Re:Visual walkthrough and commentary of the mayhem by HeckRuler · 2012-08-03 08:59 · Score: 2

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.

TFA by Anonymous Coward · 2012-08-02 04:53 · Score: 5, Informative

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? by Kelbear · 2012-08-02 04:54 · 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?

Re:Defend flash trading? by turkeyfeathers · 2012-08-02 04:58 · Score: 5, Insightful

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? by Genda · 2012-08-02 04:59 · Score: 5, Insightful

What part of wealthy, powerful people with vast computing power screwing the general public do you not understand?
Re:Defend flash trading? by Anubis+IV · 2012-08-02 05:03 · Score: 2

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? by Kelbear · 2012-08-02 05:08 · Score: 5, Insightful

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? by jgtg32a · 2012-08-02 05:10 · Score: 4, Informative

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? by Stirling+Newberry · 2012-08-02 05:31 · Score: 2

It destabilizes prices, and that is what traders trade.

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Fugue for Aaron Swartz
Re:Defend flash trading? by xs650 · 2012-08-02 05:39 · Score: 2

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? by cp5i6 · 2012-08-02 05:50 · 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.
Re:Defend flash trading? by gl4ss · 2012-08-02 05:51 · Score: 4, Informative

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.

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world was created 5 seconds before this post as it is.
Re:Defend flash trading? by GameboyRMH · 2012-08-02 06:27 · Score: 2

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

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"When information is power, privacy is freedom" - Jah-Wren Ryel
Re:Defend flash trading? by cp5i6 · 2012-08-02 06:36 · Score: 2

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? by hairyfeet · 2012-08-02 06:36 · Score: 4, Informative

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.

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ACs don't waste your time replying, your posts are never seen by me.
Re:Defend flash trading? by turkeyfeathers · 2012-08-02 06:45 · Score: 2

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? by cp5i6 · 2012-08-02 08:45 · Score: 2

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? by hairyfeet · 2012-08-02 09:05 · Score: 4, Informative

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.

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ACs don't waste your time replying, your posts are never seen by me.

Too bad by sanosuke001 · 2012-08-02 04:56 · 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

Re:Too bad by pnutjam · 2012-08-02 05:17 · Score: 4, Funny

They did save the game before running the software.

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Cheap storage VM.
Re:Too bad by cp5i6 · 2012-08-02 05:33 · Score: 5, Informative

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 by MarkGriz · 2012-08-02 06:44 · Score: 2, Funny

-The algorithm, rather stupidly, bought high and sold low.
“I always do that. I always mess up some mundane detail"

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Beauty is in the eye of the beerholder.
Re:Too bad by ceoyoyo · 2012-08-02 07:38 · Score: 2

"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 by cp5i6 · 2012-08-02 08:27 · Score: 2

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 by Whorhay · 2012-08-02 09:32 · Score: 2

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.

Why the double standard? by JDG1980 · 2012-08-02 04:57 · Score: 5, Insightful

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? by Genda · 2012-08-02 05:06 · Score: 3, Insightful

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? by ranton · 2012-08-02 05:11 · Score: 3, Interesting

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.

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-- All that is necessary for the triumph of evil is that good men do nothing. -- Edmund Burke
Re:Why the double standard? by ranton · 2012-08-02 05:18 · Score: 2, Informative

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.

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-- All that is necessary for the triumph of evil is that good men do nothing. -- Edmund Burke
Re:Why the double standard? by gl4ss · 2012-08-02 05:40 · Score: 2

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!"?

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world was created 5 seconds before this post as it is.
Re:Why the double standard? by PRMan · 2012-08-02 05:55 · Score: 3, Insightful

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

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Peter predicted that you would "deliberately forget" creation 2000 years ago...
Re:Why the double standard? by TFAFalcon · 2012-08-02 07:02 · Score: 2

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? by nitehawk214 · 2012-08-02 07:07 · Score: 2, Insightful

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.

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I'm a good cook. I'm a fantastic eater. - Steven Brust
Re:Why the double standard? by sjames · 2012-08-02 08:49 · Score: 2

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? by Clifton+Beach · 2012-08-02 11:38 · Score: 3, Informative

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.

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42 hidden comments

At least the stock analysts are on the job by cpm99352 · 2012-08-02 05:00 · Score: 5, Funny

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

Knight really this screwed up... by turkeyfeathers · 2012-08-02 05:06 · Score: 5, Funny

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.

Simple solution by nedlohs · 2012-08-02 05:09 · Score: 5, Insightful

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 by CaseCrash · 2012-08-02 06:45 · Score: 2

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.

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No, that link you posted to a web comic we've all seen a hundred times is not "obligatory."

They're not do-overs by Anonymous Coward · 2012-08-02 05:11 · Score: 2, Informative

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.

Too bad, so sad.. by n5vb · 2012-08-02 05:12 · Score: 3, Insightful

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.

Why ignore inflation? by hawguy · 2012-08-02 05:19 · Score: 3, Informative

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)"

Moral Hazard by wren337 · 2012-08-02 05:21 · Score: 4, Insightful

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 by alphred · 2012-08-02 06:34 · Score: 5, Insightful

Dude, it's Wall Street. They don't have to live with consequences.
Re:Moral Hazard by th1nk · 2012-08-02 06:53 · Score: 4, Insightful

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 by ShanghaiBill · 2012-08-02 09:17 · Score: 5, Insightful

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.

HFT for dummies by ShanghaiBill · 2012-08-02 06:06 · Score: 3, Informative

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 by makomk · 2012-08-02 06:38 · Score: 3, Informative

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 by cpm99352 · 2012-08-02 07:12 · Score: 5, Informative

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 by ceoyoyo · 2012-08-02 07:23 · Score: 4, Insightful

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 by johnjaydk · 2012-08-02 07:33 · Score: 5, Insightful

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.

--
TCAP-Abort
Re:HFT for dummies by ceoyoyo · 2012-08-02 07:33 · Score: 3, Informative

"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 by citylivin · 2012-08-02 07:37 · Score: 3, Interesting

"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.

--
As a potential lottery winner, I totally support tax cuts for the wealthy
Re:HFT for dummies by HeckRuler · 2012-08-02 07:44 · Score: 2, Insightful

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 by rundgong · 2012-08-02 07:45 · 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
Re:HFT for dummies by z4ce · 2012-08-02 09:27 · Score: 2

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 by sjames · 2012-08-02 10:37 · 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.
Re:HFT for dummies by olau · 2012-08-03 00:19 · Score: 2

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:Automatic Trading should be Throttled by th1nk · 2012-08-02 06:46 · Score: 2

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

Well, which is it?

It's kind of a Schrodinger thing by publiclurker · 2012-08-02 07:06 · Score: 2

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

Re:Why do we need uSec trading? by bobbied · 2012-08-02 07:21 · Score: 4, Insightful

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.

--
"File to fit, pound to insert, paint to match" - Aircraft Maintenance 101

Re:Automatic Trading should be Throttled by crazyjj · 2012-08-02 07:22 · Score: 3, Funny

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

--
What political party do you join when you don't like Bible-thumpers *or* hippies?

Re:Canceled trades by cpm99352 · 2012-08-02 08:12 · Score: 2

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.

This was not algorithmic trading. by JazzHarper · 2012-08-02 10:30 · Score: 3, Interesting

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?

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