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Knight Trading Losses Attributed To Old, Dormant Software

Posted by Soulskill on from the they-set-themselves-up-the-bomb dept.

New submitter alexander_686 points out a Bloomberg article about the cause of Knight Capital Group's $440 million algorithmic trading disaster from a couple weeks ago. The report says a dormant software system was accidentally activated on August 1, which immediately began increasing stock trade volumes by a factor of 1,000. The Wall Street Journal has further details: "Knight Capital Group Inc.'s accidental trades earlier this month were triggered by a flawed upgrade of trading software that caused an older trading system connected to the computer code to inadvertently go 'live' on the market, according to people familiar with the matter. The errors at Knight on Aug. 1 involved new code the Jersey City, N.J.-based brokerage designed to take advantage of the launch of a New York Stock Exchange trading program, which was introduced that day to attract more retail-trading business to the Big Board, the people say. ... When NYSE Euronext trading floor officials called Knight at about 9:35 a.m. to try to pinpoint the cause of unusual swings in dozens of stocks, just after the Big Board opened for trading, Knight traders and their supervisors had a difficult time detecting where in its systems the problem was located, say people familiar with the morning's events. The NYSE had to call Knight several times before deciding to shut the firm off, the people say."

6 of 223 comments (clear)

  1. Re:The NYSE shouldn't reverse trades. by ThatsMyNick · · Score: 4, Informative

    This is not high frequency trading. Google it to learn what it is.

  2. Stock trading robots are destroying the markets by hsmith · · Score: 4, Informative
    The Fool has a great article on this. You simply can't compete.

    http://www.fool.com/investing/general/2012/08/10/the-terrifying-graphic-that-shows-stock-trading-r.aspx

    ...the GIF charts the rise of HFT trading volumes across all U.S. stock exchanges between 2007 and 2012. The initial murmur, the brewing storm, the final detonation: Not just unsettling, it's terrifying. ... we don't know is [sic] what the long term consequences are of all this hyper-volume as depicted by the Nanex GIF and the kind of systemic risks created from the market's ongoing evolution from human traders to rapidfire AI. Sometimes things go wrong, a software glitch, an algorithm gone rogue and the music stops, like last week when Knight Capital (NYSE: KCG ) lost $10 million a minute when it's [sic] trading platform went haywire...

    1. Re:Stock trading robots are destroying the markets by jpmorgan · · Score: 2, Informative

      That is the most out-of-context thing I've ever seen on slashdot. You took the quote that the article was disagreeing with, and presented it as the article's thesis instead. For the curious, here's the final paragraph of the article linked:

      Whether increased participation from HFTs is a good or bad thing is up for debate, as is whether steps need to be taken to limit the activity of HFTs. And that's a debate that needs to happen, but it needs to happen based on solid facts and a good understanding of what's really going on.

      This particular graphic, however, was assigned meaning that was never actually there. To me, this suggests a high level of fear (whether warranted or not) of HFTs, a lack of understanding of what HFTs are doing, journalistic laziness, or, probably, a bit of all three.

  3. Re:The NYSE shouldn't reverse trades. by trout007 · · Score: 5, Informative

    I use a method by the late great Harry Browne he called failsafe investing.

    Here is the summary. Divide your investment into quarters.
    25% S&P 500 stocks
    25% 30 year Treasury Bonds
    25% 100% Treasury Money Market (If you can find one. They pretty much all went under after they put FDIC on money markets)
    25% Gold Bullion Coins

    As you save add your funds to the Cash (Money Market) portion.
    Every once in a while check the balances. If any gets above 35% or below 15% of your total portfolio re-balance it to 25%.

    The beauty of it is that when anything bad happens it is usually people running from one of these to another. This allows you to automatically buy low and sell high.

    I've averaged about 12% per year for the last 10 years. You don't get as good of a return long term as the S&P 500 but it's also less scary.

    --
    I love Jesus, except for his foreign policy.
  4. Re:I keep laughing at my friends... by jpmorgan · · Score: 4, Informative

    Liquidity isn't about time, it's about spread. Stock markets are double-auction systems, where you are free to bid and offer at any price you want. Trades only occur when someone offers a stock for less than someone else's bid price. The stock has a 'price,' and to buy stock you have to bid a little higher, and to sell you have to bid a little lower. The difference between the bid and offer price is the spread, and the spread represents an inherent transaction cost to most investors.

    Now liquidity is just how easy it is to convert your stock into cash. There is always some liquidity, as long as you're willing to accept a bad deal. You offer to sell your stock cheaply enough, or buy high enough, and somebody will buy or sell. Of course, on blue chip stocks, the spread has always been pretty small, so it has never cost a lot to trade in those stocks. But in medium-cap and small-cap stocks, where HFTs have had the biggest impact, they've reduced spreads enormously.

    Twenty years ago before the rise of HFT traders, you might had paid a market maker $0.50 / stock on the spread for a trade in a medium-cap stock. If you want to rebalance your investment portfolio annually, those kinds of transaction costs could wipe out your gains. It effectively priced individual investors out of the market, and if you wanted to save money you were forced into the hands of large institutional investors, who will happily charge you a 2% management fee for the pleasure of handling your money.

    Today we take it for granted that most stocks have very small spreads, and you can make regular trades without seeing all your gains lost to transaction costs. HFTs have put the Serious Men in Suits market makers out of business, and have pushed the cost of trading down to the point where the individual can manage their own savings, without having to fork over most of their profit to other Serious Men in Suits.

    So yeah, you may not like high frequency traders, but they're better than the old-boy networks of "specialists" and stockjobbers that they replaced.

  5. Re:Mod parent down... by rgbrenner · · Score: 4, Informative

    Knight lost the money, there was no parachute.

    You're right.. but how about some details?

    http://www.businessweek.com/news/2012-08-09/knight-says-it-may-face-more-burdensome-costs-from-trade-error

    Knight was saved from collapse on Aug. 6, when it received a $400 million cash infusion through the sale of convertible securities to a consortium of investors.

    Getco LLC, Blackstone Group LP, brokerages Stifel Nicolaus & Co. and TD Ameritrade Holding Corp., as well as Stephens Inc. and Jefferies Group Inc. invested in the rescue funding for knight, according to the Jersey City, New Jersey-based company. The investment will give the firms a 73 percent stake in Knight once the shares are converted into common stock.

    So there you go... they were forced to give away control of their company to a number of outside investors.