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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)."
Here http://www.youtube.com/watch?v=dOO9XxH5Nyo&list=UU6NBj2q25QL4kN8tqwU9c-A&index=2&feature=plcp
This space for rent.
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/
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?
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.
-SaNo
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.
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
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.
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.
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.
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.
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
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.
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
... 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
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.