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Knight Trading Losses Attributed To Old, Dormant Software
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."
They really need to stop giving these high frequency traders these parachutes. You screw up your algo, its your own damn fault. Lost your butt on the market - oh well.
that say this stuff spells the end to high freq trading. The trouble is HFT is less about investment and more about skimming off the top. HFT Traders take a percentage of a company w/o ever actually owning it. The increase in liquidity is so small that legitimate investors don't even notice it (who cares if my stock sells in .1 milliseconds vs 5 minutes if it was an investment). No real money was lost for the HFT'ers because they were never actually creating anything productive in the first place. They'll recover from this and continue to be yet another bloated tick on the face of capitalism.
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Tell us, oh Bloomberg, some more about this "code in the programming language known as C++ and for a Linux operating system" of which you speak. Perhaps you can explain it to us using words in the language known as English recorded under a human visual-input system known as text.
This is why mission critical systems should have a "No Dead Code" requirement.
General Relativity: Space-time tells matter where to go; Matter tells space-time what shape to be.
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Did nobody think to sound the alarm when the consoles started displaying... *BRAINZZZZ...* ?
They probably sent IT techs into the server room one at a time.
Questioning the sacred money makers and their value to society? You're no conservative, you're a communist, probably a Muslim and likely a Kenyan anti-colonial.
"Knight Capital Group Inc. (KCG)'s $440 million trading loss stemmed from old computer software that was inadvertently reactivated when a new program was installed, according to two people briefed on the matter"
"Once triggered on Aug. 1, the dormant system started multiplying stock trades by one thousand"
"High-speed programs that funnel orders to markets need software engineers who can write code in the programming language known as C++ and for a Linux operating system, he said in a phone interview"
AccountKiller
...the new one is better
Yep, that's my story, and I'm stickin' to it.
“He’s not deformed, he’s just drunk!”
Since when was capitalisim a "merit based system"?
And did you exchange a walk on part in the war for a lead role in a cage? - Pink Floyd.
http://www.fool.com/investing/general/2012/08/10/the-terrifying-graphic-that-shows-stock-trading-r.aspx
Stop being a filthy commi. Money gives you merits, duh.
This is what happens when the pre-production environment is not identical to the production environment. Got egg on my face (though no direct financial cost incurred) when the production environment had that 0.01 JRE increment that addressed the new-fangled daylight saving time, and the pre-production environment did not. It caused some very strange bugs due to the change in date handling, even though it wasn't anywhere close to spring forward time. (We developers had no access to the machine, so it took a while to figure out, too.)
Yeah, with capitalism the birth lottery is often more important than merit.
Everyone whines about HFT, but don't realize that it actually does add liquidity. It also means that the people trading do take their risks, and have to pay for them. It's a fair trade. LFT (Low Frequency Trading), is not necessarily any better. The AMEX used to have "specialists" that were on the floor who were supposed to make sure that the trading happened smoothly, what actually happened was that the "specialists" were basically given the right to "skim" off the top, just like HFT traders do. Before everything was electronic, orders would hit the exchange and the specialists had a chunk of time to decide on what they wanted to do. In that time, they would see what was going on in the market, and make sure they could do both sides of the trade and make the bid ask spread. The difference between then and now is that then they had special privileges that no one else had.
Then there's the fact that the stock exchanges in the US almost stopped in the 70's because they were too slow. No one could keep up with the paperwork. That's when the DTC was created http://en.wikipedia.org/wiki/Depository_Trust_%26_Clearing_Corporation. If you think trading was more scrupulous then than it is now, you are out of your mind.
Frankly, if you don't like the stock market, don't put money into it. I personally find it hard to put money into a company I really know nothing about. If you do enter the market, via a broker or your 401k, then you should be happy it's as efficient as it is. It costs fractions of a penny for each share as a transaction cost. Compare that to your house, which probably ran 3-6% for just the brokers fee, then lawyers, then all the other closing costs. You could do a similar transaction of hundreds of thousands of dollars of stock on the stock market for next to nothing and if you put in a limit order, you won't lose anything to the HFT traders.
What he's likely saying is that, ideally, capital flows to those companies and endeavors "needing it" most, usually viewed in valuation, usually meaning paying customers want that companies products built and they are willing to buy.
Speaking of which, did you have an alternative?
Allocation of capital by central committee? That would be a totally "merit based system", right?
I'm not a lawyer, but I play one on the Internet. Blog
You're fired!
"Everyone whines about HFT, but don't realize that it actually does add liquidity"
HFT adds nothing, all these trades do is take from the muppets (clueless investors) and give to the huge financial houses. The muppets add wealth by going into perpetual debt in order to buy luxury goods on the high street. The money for which is 'loaned' by the self same financial houses. You're only worth as much debt as you can incur over your lifetime. Yes - they're is a metric for that too.
AccountKiller
How's that? Knight screwed up badly, and the mistake has cost them $400 million dollars. Sounds pretty merit-based to me.
A bit simple minded.
Capitalism is a system with several distinct components. Investment is a process whereby wealth is accumulated and used to develop mines, factories and the like which in turn create more wealth. Finance is the operation of banks and other institutions to move money from place to place. Markets are places, real or virtual, where goods are traded or exchanged for money. Markets, mines, factories and banks all existed long before Adam Smith developed his theories about them.
Over the last couple of centuries we have (at least in theory) had a system called Free Market Capitalism. A market system may be considered free when it is not unduly controlled by governments or monopolies. We have also been rather keen on Free Enterprise, which means mines, factories and so on are privately owned and operated in a manner reasonably free of government interference. We do, however expect a system of laws governing contracts to enforce repayment of loans and delivery of goods that have been sold. There may even be laws holding mine and factory owners liable when they kill or poison their workers, although there are certainly those who regard this as undesirable interference.
Too Big to Fail generally means we're in a situation where owners no longer suffer the consequences of failure as they are assumed to do in Free Market Capitalism. We the people didn't get a voice in how they were run, but we're supposed to bail them out.
The stock market is the interface between Finance and Investment. It is indeed part of the capitalist system as we know it. If you buy shares in a limited liability company, you're putting your money at risk, hoping the operations of the company will be profitable. However, if you're just looking for a quick return in the short term, you probably don't care if the company is successful in the long term. You may pressure the directors to go for short-term profits to drive the share price up so you can sell your shares at a profit, leaving someone else holding shares that will lose their value when the short-sighted decisions lead to problems.
The stock market is not necessarily good for the long term health of the economy.
If companies are owned by people who have their own money invested, they will probably be managed for a balance of short and long term returns. If companies are run by managers who are trying to attract the interest of day-traders, then main street may very well suffer.
Capitalism requires companies to be able to raise money through investment in shares, but there's no guarantee that stock markets will operate in a way that leads to a healthy capitalist economy.
The universe was intelligently designed. Unfortunately God was in a hurry so he coded it in Java.
Knight lost the money, there was no parachute.
How is the stock market not merit based? Good companies succeed and are good investments for their owners.
"capital flows to those companies and endeavors 'needing it' most"
From each according to his ability, to each according to his need... no, wait, that's not right.
Capitalism is essentially a "wisdom of the crowd" approach to allocating resources. It seems to work pretty well, when properly regulated, but it definitely doesn't pay any attention to abstract concepts like "merit." Contrary to what the OP said, the stock market is the epitome of capitalism - a place where individuals with capital can allocate it however they see fit.
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The majority of stock market types have been dependent on government/Federal Reserve sponsored inflation for the bulk of the 20th century. One could hear the hard money advocates of the 70s discuss and mock the 20s-30s cries from Wall Street for more liquidity, even in the good times. Ditto the 70s inflation. Wall Street has been a scan site in dozens of ways, protected and pumped by the Federal Reserve/government.
You fail to see why people would bring their companies public? It's a damn good way for a popular business to make a whole boatload of money.
Of course if you have a privately held business that you want to keep control of, this is a bad way to get money. If you are a specialty shop with a very unique business, you simply aren't having an IPO. If you have a company that can self-replicate and produce new and better trinkets in China with your current business plan and some extra cash, holding an IPO might be practical. The stocks that the owners and employees get to cash out is also the only way that most of these people could ever expect to make large amounts of wealth.
Very interesting thinking. You may also be interested in The Managerial Revolution, a book by James Burham, an early American Trotskyite, and later conservative.
In it, he posits (among other things) that the separation of ownership and control had become a strong part of American economic thought. Burham thought that the managers (CEOs, etc.) appointed by owners through boards would set themselves up as a privileged class, with loyalty more toward their own interests than those of the owners.
He also analyzed whether capitalism was a permanent phenomenon, or one with a definite start and possible end.
http://en.wikipedia.org/wiki/James_Burnham
I'm not a lawyer, but I play one on the Internet. Blog
Which other companies do you know have so much faith in their test systems that they successfully deploy them for real world operations?
"Successfully" might not be the right word to use in this case... ;-)
It is a merit base system. Intelligent investors like Warren Buffett get rich through intelligent investing, while stupid people like me instantly become poor due to speculation.
Copypasta from the definitive study of millionaires. "Millionaire Next Door" by Thomas J. Stanley and William D. Danko
Some Shocking Statistics about these Millionaires:
-The average taxable income for them is $131,000
-They live on less than 7 percent of their wealth
-Many of their occupations could be classified as dull-normal such as: welding contractor, auctioneer, mobile-home owner, paving contractor, coin and stamp dealer
-They invest on average nearly 20% of their household income
-Most of them are homeowners (97 percent) and their average home value is $320,000
-80% of millionaires today are first generation millionaires
Everyone thinks millionaires are usually born that way, not really true at all. Most just save their way into it.
If you are going to spew this stuff at least read some well researched books to back it up.
The distinction you describe makes no sense. It's an electronic exchange, so computers are involved. So you say human should push the button to do a trade - fine; what if I want to do a portfolio of different stocks - do I have to press the button for each stock separately or am I allowed to press the button once? Now what if I want to split a big trade into multiple small trades over the course of the day to minimize market impact - should I be sitting there, watching a clock and pressing that button every so often? Don't you think that's silly?
So what exactly are you proposing to ban? Humans using computers to carry out pre-defined series of actions on request? That's all automated trading is. Of course there is a human somewhere at each legal entity that enters into trades on exchanges, who bears responsibility over what trades are done and controls what sofware runs when, so ultimately 'pushes the button' - or do you think the software trades on its own account without humans involved?
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You can argue that the end result of ANY system is merit based. Centrally planned monarchy? The king, or whoever controls him, must have gained and retained that ability by some merit.
Capitalism, as a means of deciding what gets produced, isn't really a merit based system. Individuals will choose to invest in things for a wide variety of reasons. Some will succeed and others will fail. Warren Buffett might have gotten rich through intelligent investing, or he might have been in the right place at the right time. What will his heirs do?
The details on this bug are scarce, but for those of us in the business it's important to find out exactly what happened to evaluate the risk of similar software.
From the description of the problem in the press - i.e. the quantities were being multiplied by 1000 - I'm theorizing that one potential explanation is that the field representing the quantity in the order message was incorrectly coded into an Integer format when a Decimal was expected. In the FIX specification, a widely used protocol for carrying electronic trade messages between market participants, the quantity field can sometimes be specfied as an Integer value, in which the actual quantity can be specified to three decimal point accuracy and then multiplied by 1000. For instance, an order to buy 603.234 shares of some security might be represented as the value 603234. Both the sender and receiver know to divide the transmitted value by 1000 to get the actual quantity. However, this is not standardized, and some FIX variants use an actual decimal representation.
Given the description of the problem, I'm curious to know whether this was what actually occurred here. The proffered explanation - i.e. a "dormant" system somehow "woke up" and decided to multiply every transiting order by 1000 - makes exactly zero sense. High speed trading systems are architected like this. However, I could see some confusion over Integer vs. Decimal format, together with an error that resulted in stale code somehow being released into production as being a possible scenario.
Is there anyone with direct knowledge of the situation that can give some feedback?
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Decided their fate in a millisecond ...
Lurking in the desert
The main key there is slow steady savings it worked in the past and seems to be working fairly well now for me. My father's parents were a prime example of this. Both grew up during the depression on farms and put themselves through school. My grandfather got a degree in mathematics while my grandmother got one in chemistry. After graduating my grandmother got a job working for DOW chemical and during WWII worked at a munitions plant. My grandfather meanwhile went and joined the Marines as an officer and went off to fight in the Pacific. After the war is when they met and got married. My grandmother continued to work as a chemist while my grandfather went into teaching and eventually made it to being a district superintendent and then worked for the Minnesota department of education. My grandmother was the one who made the bulk of the income but they didn't buy lots of fancy stuff and saved. By the time they both retired they were multimillionaires and had a good enjoyable retirement doing things they wanted to like traveling to all sorts of exotic places. Now with my grandfather passed on my grandmother has decided to sell the house and and move to a retirement community condo as she can't really manage the upkeep on the house and doesn't need a 3 bedroom 3 bath 1800 sq. ft. house. She is still very active but is slowing down but that is expected when you are 90.
I know some of my relatives are in desperate need of their share of the inheritance but then they they are spenders and have to have every toy, gadget, thing to keep up with everyone else. My father is getting better as he nears retirement but it is going to be tough for him, my mother and step father are basically screwed and they just did a cash out refi on their house and got a brand new 30 year mortgage even though they only had about 8 years left to pay on it. They took out as much as they could so now their mortgage is for 80% of their home's value again and they have staved off the day of reckoning for a few years but it will come. Even my sister doesn't get it and spends money like it is going out of style, always has to have the newest shiniest thing and get new vehicles when there is still money to be paid on the previous ones' loans. On the other hand my wife and I save well over 25% of our income, just refinanced our house to a 15 year mortgage (cutting 8 years of payments off yet costing only $12 more a month) and drive paid for good condition used vehicles until they don't run anymore (my wife has a 12 year old car and I have a 15 year old car). Every year except '08 our net worth increased, and even in 08 on only went down about 2%. Now that things aren't in a massive downward spiral all the buying we did in '08 has paid off in spades and we now have doubled our investment assets. When we first met with our financial planner we were asked when do you want to retire and I jokingly said 50. He came back to us after running the numbers and such and said we could do it at age 50 but it might be tight but if we waited until 55 then it would basically be a sure thing. My wife and I plan on working longer than that (who really knows now since we are in our early 30s) but are sticking to saving like we are going to retire at 55. The other nice thing is we will have our house paid off before our oldest starts college and that will free up money to help pay for that.
Time to offend someone
I am a millionaire and I got there this way.
I don't feel rich. Most of my friends and neighbors have done the same thing.
With the way entitlements programs are going I have no idea if this will be enough to retire on comfortably.
With inflation a million dollars is worth about 3% of what it was in 1920.
So this study is worthless because these days a million dollars is not real wealth.
So we are back to the idea that in capitalism the birth lottery is worth much more than merit.
Next?
By whose measuring stick do we judge merit?
Without having an account and logging in, I can't read the full article. But from the story, "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"
Say *what*? What does "older trading system connected to the computer code" mean? That there was some magical code to allow something? That the new system went through an obsolete java link?
Communications major, obviously: doesn't get it, and don't know that they don't get it.
mark
I never said it was foolproof. I said it was a damn good way to make money. You'll never have full control of anything larger than yourself in this life, why would an IPO be any different?
The people who are lucky enough to get rich in an IPO are just that...lucky. But make no mistake, that IS why people bring their companies public.