How To Lose $172,222 a Second For 45 Minutes

An anonymous reader writes "Investment firm Knight Capital made headlines in 2012 for losing over $400 million on the New York Stock Exchange because of problems with their algorithmic trading software. Now, the owner of a Python programming blog noticed the release of a detailed SEC report into exactly what went wrong (PDF). It shows how a botched update rollout combined with useless or nonexistent process guidelines cost the company over $172,000 a second for over 45 minutes. From the report: 'When Knight used the Power Peg code previously, as child orders were executed, a cumulative quantity function counted the number of shares of the parent order that had been executed. This feature instructed the code to stop routing child orders after the parent order had been filled completely. In 2003, Knight ceased using the Power Peg functionality. In 2005, Knight moved the tracking of cumulative shares function in the Power Peg code to an earlier point in the SMARS code sequence. Knight did not retest the Power Peg code after moving the cumulative quantity function to determine whether Power Peg would still function correctly if called. ... During the deployment of the new code, however, one of Knight's technicians did not copy the new code to one of the eight SMARS computer servers. Knight did not have a second technician review this deployment and no one at Knight realized that the Power Peg code had not been removed from the eighth server, nor the new RLP code added. Knight had no written procedures that required such a review.'"

Comments

Re:There should be a mandatory one second delay.

[girlintraining]

Eh, other posters have already pointed out that you're referencing high frequency trading, not algorithmic trading, so this is offtopic. Nonetheless... where exactly do you think this 1 second delay should be put in, and what would it accomplish? Make the wires "longer"; That would mean less contention for premier data centers in NYC. In one second, you can send a signal around the world five times over. But that doesn't help with the propagation of trade data from which the trades are based on; By adding all that extra lag only in terms of trade execution, but not market data, you're potentially putting billions of dollars at risk as trades are now following market data, instead of running concurrently with them. Think of it this way: You swipe your card to pay for gas. The price shown is $3.55. But when you start the pump, the price drops to $3.54. But you started the pump a second too late, so you're billed a penny more than the guy who waited a split second. Now, multiply this a few million times and suddenly you've got a market crisis. It's the same if you lag the market data but allow trades at full speed.

Let's say you put this one second latency in for both sides; trade execution and market data. How exactly do you syncronize the data when the price itself is determined by trades -- you potentially have more trades waiting to be executed than you have shares... the price is now in some kind of weird state whereby it cannot be accurate until the trades are complete, yet as the trades complete the price is trading. Now you've turned a tiny amount of speculation into a massive amount of speculation. You've made the problem a thousand times worse!

You see, no matter where you put in your "one second delay", you're reducing liquidity, increasing costs, and causing money to be lost out of the system. Your idiotic attempt to help the "little guy" has resulted in utter chaos at best, and only made it harder for him at worse!

High volume trade is just margin trading; Buying low and selling high. Now there's a lot of macroeconomic theory to go into what I say next, too much for a slashdot post, but fundamentally... the more trade there is, the more wealth there is. Lots of trades mean the market is healthy. It means money is moving... and the more money moves, the more it trades hands, the more value that money has. The only time money loses value is when it sits in an account doing nothing. It's like potential energy versus kinetic energy. You cannot harness the power of something that isn't moving.

Every time I hear about people bitch about high volume trading and "the little guy" I die a little inside; It shows a shocking lack of understanding of how markets actually operate, and how these sorts of trades benefit everyone by improving liquidity. The last economic crisis, in fact, the core of all economic crisis, is the lack of money moving. You can't invest because nothing is producing. You can't produce because nobody's investing. These kind of mexican standoffs are what lead to recessions and depressions. Liquidity is at the very heart of any boom, and its absence at the heart of every bust.

The reason why the "rich and powerful" have created a wealth gap is because money isn't trading hands. There's no trade going on -- the middle class isn't buying anything new, they're just paying off old debts. The upper class are the only ones with any liquidity, and they're holding onto money because there's nothing to invest in; If nobody's buying anything, what then is the point of investment? There's no return then. And the poor... they can't invest. They're living hand to mouth, paycheck to paycheck... economically, they're useless. They'll spend every dollar they're handed on the same things every day -- food, shelter, clothing, gas, rent... these things are essential to daily life, but they don't grow an economy. To get economic growth, you need people buying laptops, cars, services, luxury items.

And what started all of this? Ironically, it was a small segment of the population -- th