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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.'"
Back in the late 90s when I was system admin for a trading company, they recruited me from a place that did 911 computer aided dispatch software. My shop, at least, recognized that some of the same reliability issues were at stake, so some people get it.
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.
Reports have it that rather than releasing a buggy system, the problem was caused by running the test harness in a production environment. More here:
http://www.theregister.co.uk/2012/08/08/knight_capital_analysis/
http://www.nanex.net/aqck2/3525.html
http://www.zerohedge.com/news/what-happens-when-hft-algo-goes-totally-berserk-and-serves-knight-capital-bill
It wasn't HFT software, it was regular trading software. The developers created a build of the software that included a module that generated lots of silly trades as test data. The software was hooked up to the exchange as a live test to ensure it would talk to the exchange correctly. Unfortunately, they used the software build that included the test trade generator, and those test trades started executing for real.
It wasn't actually a bug; everything worked perfectly. It was more of a configuration management problem.
The only relevance it has to HFT is that if the NYSE limited the rate of trades then a lot less money would have been lost.
It's already such a waste that so much talent is getting thrown at problems that seek to make money while producing absolutely nothing. HFT is cleverly sanding in the middle of a river in an eddy and dipping your hand in to tap power without getting pushed downstream. What does Wall Street actually produce? What is their product? Why should we care that they periodically lose their minds and shirts? If anything HFT should be taxed into oblivion so that excellent minds aren't recruited to deliver nothing of social value.
"There are some people that if they don't know, you can't tell them." ~ Louis Armstrong
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.
Is it me or are we continuously using "profits" as a excuse for bad *anything* and pushing that idea to an extreme?
Blair K., Certified Master of the Scrum, responded: "Well, that doesn't sound like a very agile process to me! "Certified" and "compliant with a standard" sound pretty waterfallish. Why not just have a 15-minute standup and decide to launch the plane? At last the aerospace industry could deliver aircraft on time and under budget."
Customer wants their plane painted hot pink? We can totes do that, bros! Shouldn't take more than 24 hours to get to Home Depot and get a few cans of spraypaint. Delivered! And if bits of paint peel off at altitude and get sucked into the engine, gluing themselves to the turbine blades until catastrophic failure of an engine, well, we can just patch the paint recipe in the next sprint! Paint that's "hot pink" is part of this sprint. The user story about engines that don't fail is part of the next sprint.
The real problem with aircraft design is that all our little user stories are in a big clunky database. If we printed out the database's contents (by hand!) on little 3x5 index cards, then we'd be using the best practices of both Scrum and Kanban. Our planes would be so damn agile they'd have turning radii measured in inches.
When a senior engineer piped up that an aircraft with a turning radius measured in inches would kill everyone on board due to G-forces measured in the thousands of Gs, and would likely tear itself apart because the centripetal force far exceeds the tensile modulus of steel, titanium, carbon fiber, or anything else available, he was terminated because "switching from traditional tube-construction to blended-wing-body design made of unobtanium" was part of the next epic.
This isn't the equivalent of $500m of infrastructure burning down. The money was lost by some investors, but gained by other investors.
"Anyway, no drug, not even alcohol, causes the fundamental ills of society. If we're looking for the source of our troubles, we shouldn't test people for drugs, we should test them for stupidity, ignorance, greed and love of power." -- P. J. O'Rourke
"Can there be a Klein bottle that is an efficient and effective beer pitcher?"
The really troubling thing (to my mind) is not so much the 'what does Wall St. produce?' question(which, as you note, is ostensibly 'capital allocation'; but the 'how efficiently do they actually produce it?' question.
In a non-pathological market situation, you would hope to see Wall St.'s share of the economy as a whole be static or declining(as newer technology makes allocating capital easier and less expensive) and the demand for 'capital allocation' exist only so far as other business sectors find that more efficient capital allocation makes them more efficient and productive(in the same way that you would want to see any other support function of a business kept in line with the business overall. You wouldn't want your IT group consuming a greater percentage of your total economic output every year). Trouble is, that isn't what the numbers reflect.
Instead of acting as other suppliers do, and having their health and size depend on the success of the customers, the financial services sector has managed to capture a steadily increasing share of the value relative to other sectors. Absolute growth would be one thing, if the economy as a whole is growing; but relative growth, in terms of percentage of total output captured, suggests a substantial increase in the market(and regulatory) power of financial services without necessarily any increase in the value of their product to their customers. That is bad.
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.
sed -e 's/Chuck Norris/Rajnikant/g' joke > fact
The purpose of avionics is to get a plane from one point to another without incident.
The purpose of automated stock trading software is to make as much money as possible while screwing the other guy if you get the opportunity.
You'll never make automated stock software 'safe'. Its purpose is inherently risky and combative. You're not up against the laws of physics and the occasional thunderstorm; you're up against other people who have similar software and an urge to hurt you. This is Wall Street PvP (that's Prick-versus-Prick). It's unsafe by its nature.
You cannot make competitions entirely 'safe'. What you can do is pen them in so that they do not hurt bystanders. Just like putting crash walls around a NASCAR track, we need to put up regulations around Wall Street so their blood combat does not spill out and harm the larger economy. Re-implementing Glass-Steagall is the least that we can do to keep Wall Street's fiery crashes from hurting the common people. There are probably more reforms we could make to wall them off properly.
Genocide Man -- Life is funny. Death is funnier. Mass murder can be hilarious.
Oh, for an "I wish it weren't true" moderation.
This increase in the relative growth of the financial sector was one of the predictions in Karl Marx's Das Kapital: He saw bond markets and stock markets as the natural and predictable outgrowth of the role of a capitalist, which in his view was somebody who made their living not by producing stuff but by buying the means of production and making other people produce stuff. Bonds in particular simply abstract the concept completely away from any actual work: The capitalist now doesn't even do the buying and managing himself, but buys bonds allowing somebody else to do that work and demands a portion of the proceeds of the firm in return. As the capitalist class gains more and more wealth, the trade in bonds and other financial instruments goes up as a percentage of the economy, while the industrial and agricultural production becomes less important.
(And no, I'm not arguing that workers of the world should unite and revolt, just that Marx was a serious economist who made some good points about how capitalism works.)
I am officially gone from
High-frequency automated trading are destroying the stockmarket. With transactions on a stock happening at thousands of times a second, when things go bad they go bad very quickly. When things go well, the normal trader gets reamed.
IMHO High-frequency automated trading should be outlawed, stocks should be bought and sold at a rate comparable to human interaction. Say 1 per second. Then if things go bad, it goes bad over the course of a day and people can react. Brokers normally buy and sell bulk amounts of stock, so this would be no different.
It would level the playing field, and put the normal investor at less of a disadvantage compared to the big companies. If a stock is particularly hot, then some trades won't get made by the end of the day. This is in other words reverting to the stock market of old, where the market could be looked at, and expected to stay the same over the course of a minute.