Wall Street and the Mismanagement of Software

CowboyRobot writes "Last week, a bug in high-frequency trading software from Knight Capital Group resulted in erroneous trades costing almost a half-billion dollars. So, what went wrong and how can they, or any other software developer, prevent something similar from happening again? In hindsight, it's clear that the developers did not verify the code under enough conditions. But the real issue is how these high-frequency trades work in the first place. Robert Dewar at Dr. Dobb's suggests the financial industry needs to take a page from the avionics rulebook, which has very strict guidelines about what code can be implemented due to the high cost of failure in that field. 'High-frequency automated trading is not avionics flight control, but the aviation industry has demonstrated that safe, reliable real-time software is possible, practical, and necessary. It requires appropriate development technology and processes as well as a culture that thinks in terms of safety (or reliability) first. That is the real lesson to be learned from last week's incident. It doesn't come for free, but it certainly costs less than $440M.'"

Comments

Wny not just tax trades?

[Anonymous Coward]

First 100 trades in a day: free
Next 1000, taxed at 0.02%
Next 1000, taxed at 0.1%

And so on.

This would do wonders for the problem.

Re:Wny not just tax trades?

[sycodon]

Outlaw HFTs They just pervert the market.

Re:Wny not just tax trades?

[jedidiah]

As someone that actually stands to lose from Obama's tax policy, I understand the need to do my fair share in tough times. I also freely acknowledge that giving young families and recently graduated students more money will more likely cause money to move around the economy.

Not everyone with money is a narcissist jackass.

Warning to execs

[jerpyro]

Maybe it should serve as a warning to executives to not release buggy software. I know a lot of shops that push things out the door before they're fully baked.

In terms of the stock market, I don't see a problem. The long-term market wasn't affected, no value was created or destroyed, and those who played the game improperly lost out big time. Short term trades on the exchange are gambling. Anyone who tells you otherwise just wants your money. Don't forget, there's always a buyer *and* a seller. Just because Knight lost $450m doesn't mean other people didn't gain $450m.

Re:Not comparable

[MickyTheIdiot]

Is it me or are we continuously using "profits" as a excuse for bad *anything* and pushing that idea to an extreme?

Re:That's What We Did

[Anne Thwacks]

You seem to assume that they want to stop the "accidents". You misunderstand the senario - the whole thing is a distributed Ponzi scheme. It works like a sort of "reverse pass the parcel". Each transaction takes a small percentage in brokerage fees as the underlying "commodity" gains or loses value. However, over time, the brokerage fees exceed the true worth of the commodity has in real life.

The spectacular "losses" are the path by which the money leaves investors, and is syphoned off to pay the disproportionate brokerage fees.

As a point of reference see gold - the value of gold traded between speculators each day is 1,000 times the value actually sold into industry/jewelery/etc - so a 0.25% brokerage fee on both buyer an seller is worth 5* the value of the gold that enters or leaves the market each day. Obviously, the additional margin actually paid by real life users for the benefits of a liquid market is a tiny fraction of the value of the gold - sometimes there has to be a "software problem" or "rogue trader" or, to use the colloquial term "scapegoat", to provide the money distributed on brokerage fees.

I am not suggesting any one person is responsible for this - the banks have colluded to look the other way while this system has developed in an ad-hoc manner. In all probability, many of the so called "masters of the universe" are too stupid to understand what is going on, as it requires an understanding of the laws of maths, which they generally don't have. The few "whizz-kids" who could understand are "highly motivated" to look the other way.

Re:So, sue the developer for the cost he caused.

[140Mandak262Jamuna]

They will sue the unemployed coder for 400 million dollars. Some CXO will certify in good faith he hopes to collect the money. S&P will accept the certificate and rate the credit worthiness of the company AAA. Goldman Sachs will use S&P rating to sell the company to some poor smuck, your 401K mutual fund or my pension fund or our municipalities long term fund at 400 million over the true worth. Everyone involved in the racket will award themselves huge bonus, consultation fee and commissions. That is how 400 million dollars of profits are created, transferred to private individuals and the corresponding 400 million dollar loss for the counter parties are socialized. Either small investors, or government institutionalized investors, or straight forward government bail out. We are always the counterparties who are on the losing end of every such gigantic whoppers.

America once had a great capitalism. Now we have the system where no matter what risk the rich insiders take, all the profits are theirs and all the losses are ours. A system where the ruling elites are protected from the consequences of their actions, where they can rig the game so that they win no matter what, is how societal collapse begins. Jared Diamond's book "Collapse" discusses specific case studies showing how it collapses. Greenland colonization from Iceland, Pueblo Indians, Easter Island were what he discusses in great detail.

Re:That's What We Did

[timeOday]

I find the comparison to the 911 hotline or avionics (in the summary) almost offensive. This $400,000,000 "loss" is just ownership changing hands in a zero-sum game; nothing was actually destroyed. Even individual investors (who spread their bets) were probably on both the winning and losing sides.

It's NOT the same as airplane full of people being destroyed or an ambulance failing to show up. In fact, all the money the summary suggests pouring into perfecting HFT software would be a waste and a loss to the economy overall. The real question is how can we fix the incentives to get those HFT developers back working on avionics or 9/11 call centers or something else with real value?

Re:That's What We Did

[somersault]

But the real problem issue here isn't even the buggy software IMO. It was the way the software was put into place, not monitored, and nobody was ready to just shut it off if it started going haywire. According to the article I read, Knight hadn't even noticed a problem themselves - it was pointed out to them by the stock exchange that they were doing a very high amount of trades compared to usual, and it still took them half an hour or more to shut everything down. There should have literally been a big red STOP button in place to shut things down if they went wrong.