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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."

7 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 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)
    2. 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
    3. 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.

    4. 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.
    5. 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?

  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.