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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."

23 of 223 comments (clear)

  1. The NYSE shouldn't reverse trades. by Thantik · · Score: 5, Interesting

    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.

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

      The problem with that is these Wall Street companies have their tentacles everywhere. Whatever pleasure we'd get watching them crumble is nothing compared to watching our retirement savings drop to zero and millions of people losing their jobs.

      "Too big to fail" and free market capitalism are fundamentally at odds.

      --
      There's no -1 for "I don't get it."
    2. 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.

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

      You really don't know what you are talking about. Sure the market can get volitile but most companies in the S&P 500 actually do have value. If you don't panic and cash out during the crash you will be fine. All of the financials in the S&P 500 are about 15%.

      If you are investing long term and are diversified these panics are a good time to buy.

      --
      I love Jesus, except for his foreign policy.
    4. Re:The NYSE shouldn't reverse trades. by rritterson · · Score: 5, Insightful

      The problem with that idea is that sometimes these high frequency traders also cause volatility spikes in the market, triggering other computer programs, and, sometimes, humans, to react as though the spurious trades were intentional.

      While I also loathe HFT as a scourge on the market, I think the NYSE's overall response is a good one: when abnormal trades occur as a secondary effect of other's mistakes, abort them.

      Note that the ca. $440 million loss Knight took was BECAUSE they couldn't unwind the bad positions they bought into. Goldman Sachs bought the entire block from them at a discount. Knight didn't get any kind of parachute.

      --
      -Ryan
      AUWYHSTOT (Acronyms are Useless When You Have to Spell Them Out Too)
    5. Re:The NYSE shouldn't reverse trades. by NatasRevol · · Score: 5, Insightful

      There's no short term guarantees in the stock market. If you're 70 and need cash, you shouldn't be in the stock market.

      --
      There are two types of people in the world: Those who crave closure
    6. Re:The NYSE shouldn't reverse trades. by TFAFalcon · · Score: 3, Insightful

      For everyone that looses money, some one else would gain it. If enough pension funds go bankrupt, then perhaps people will stop gambling with their money.

    7. Re:The NYSE shouldn't reverse trades. by Chris+Mattern · · Score: 5, Interesting

      Where do you suggest one goes for short-term, no-risk investments? I want to go to there.

      Money-market funds. They invest in short-term Treasuries and top-rated debt. They try to be diversified, so even an unlikely nasty surprise won't nick you much. You won't get much of a return, but your money will be most likely safe (there's no absolute guarantees anywhere, but if the money market funds go south, there's not likely to be any safe place elsewhere). With current low interest rates, you'll probably make a return of less than 1%, though.

    8. 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.
    9. Re:The NYSE shouldn't reverse trades. by ortholattice · · Score: 4, Interesting

      No kidding. Although it wasn't reversed in Knight's case, there have been many flash crashes that have been reversed, making it so that profit is almost guaranteed for HF traders: good bets go through and bad bets get reversed.

      I was personally affected a couple of years ago. I had an outstanding bid (limit order) on a stock at what I thought the stock was worth, although significantly lower than the going price, so I could pick it up in case there was a temporary drop due to negative news or whatever. The "whatever" happened; my open order got filled by HF traders due to a flash crash they caused in that stock. I got a call from my broker later in the day to tell me the SEC reversed the trades during that flash crash, including mine. So a few thousand dollars that by all rights should have been mine went back to the HF traders.

      The little guy can't win.

    10. Re:The NYSE shouldn't reverse trades. by Anonymous Coward · · Score: 5, Insightful

      Ah, that classic libertarian chestnut. If we just wipe out enough peoples' retirement funds, the problem will correct itself! Let me guess, you also think the FDA doesn't need to exist because if a bad drug kills a bunch of people, those people will just take their business elsewhere, right?

    11. Re:The NYSE shouldn't reverse trades. by hairyfeet · · Score: 4, Insightful

      Uhhh...how EXACTLY are you gonna do that when there is a revolving door between the DC swamp and Wall Street? Why do you think we now have over 400% of our GDP in the market, which is nearly 3 TIMES more than right before the crash of 29? Because they go straight from Wall Street to the halls of power, get laws written that give them moar monies, and then walk right back over to Wall street and reap the rewards.

      I'm sorry friend but until the whole thing crashes and we become another Greece or Zimbabwe there is not a damned thing you, me, or anybody else can do about it, the amount of money concentrated into the financial market means they can light bags of money on fire and the government will hand them new bags and pay for someone to clean up the ashes and just hand you the bill.

      --
      ACs don't waste your time replying, your posts are never seen by me.
  2. I keep laughing at my friends... by rsilvergun · · Score: 3, Insightful

    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.

    --
    Hi! I make Firefox Plug-ins. Check 'em out @ https://addons.mozilla.org/en-US/firefox/addon/youtube-mp3-podcaster/
    1. 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.

    2. Re:I keep laughing at my friends... by ceoyoyo · · Score: 5, Interesting

      Twenty years ago it was also much harder to match up buyers and sellers, and actual trades took a lot longer. It's hard to say how much of the decrease in spread is due to high frequency traders and how much is due to improved technology providing a more efficient, easier to access market.

      Not that there seems to be anything particularly bad about encouraging people to buy long term investments.

  3. Dead Code by sconeu · · Score: 4, Interesting

    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.
  4. Comment removed by account_deleted · · Score: 4, Interesting

    Comment removed based on user account deletion

  5. Should know better. by Sponge+Bath · · Score: 3, Funny

    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.

  6. Re:As a Conservative by TapeCutter · · Score: 3, Insightful

    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.
  7. 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...

  8. When prod-1 != prod by michaelmalak · · Score: 4, Insightful

    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.)

  9. Re:As a Conservative by the+eric+conspiracy · · Score: 4, Insightful

    Yeah, with capitalism the birth lottery is often more important than merit.

  10. 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.