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Trading Program Ran Amok, With No ‘Off’ Switch

dealbook.nytimes.com

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Re: Trading Program Ran Amok, With No ‘Off’ Switch

#21

Post by fauigerzigerk »

forgotusername wrote: post #7
nmcfarl wrote: post #2

They lost $440 million (and amount greater than their market cap), and possibly the company, on what the world knows to be incompetence. At some point if I couldn’t stop it - I’d be tempted to just kill the power to the server rooms, all of them. There just has to be a way to cut your losses.

I'd love to know what qualifies you to throw a word like incompetence around here. My best guess is the reason it took 45 minutes to shut it off was due to a judgement call: burn through free cash, or take out all their customers too. Bear in mind some of the largest retail brokerages in the world hang off Knight. Their primary functions are acting as an order destination and a market-maker, for efficiency's sake an…

$440 million is four times their 2011 net income. I doubt the CEO is comfortable with the outcome of being on the brink of bankruptcy. He is trying to arrange a fire sale of the company as we speak.

But I think you are right that they tried to avoid an outage. The incompetence, if any, is that they apparently did not know how much money they were losing and still kept the system going. It wasn't a caclulated risk but rather an incaculable one.

I imagine it's not easy to know how much you're losing at any moment in time. They certainly knew they were building huge positions, but knowing how much they were going to lose on those positions requires an estimate of the price at which the positions can be closed (or a hedge).

What I cannot imagine is that it is common practice to leave this kind of decision to an individual's judgement call. There have to be rules for a situation like this. And there's only one sensible rule for a rogue algo racking up unknowable losses. Kill it and deal with the consequences later. Anything else is negligent.

Re: Trading Program Ran Amok, With No ‘Off’ Switch

#22

Post by jonah »

jkimmel wrote: post #14
jonah wrote: post #9

"Knight is also working with Goldman Sachs to help unwind the trades behind its extensive loss, according to people briefed on the matter. "Goldman has agreed to buy, at a discount, the shares that the trading firm had accumulated. Such a move would help Knight by taking the portfolio off its hands and freeing up capital." What does this mean? Why would GS do this? Why would Knight do this? Couldn't they just sell th…

Yes and no. Given the kind of volume Knight purchased during the faulty trades, it could be difficult to offload that many shares on the open market in a timely manner. Maybe those stocks are hot Monday, maybe they're not. Knight needs capital yesterday to keep floating, so they're likely looking to sell everything in one basket. As for GS's motivation, they're buying at a discount. Due to the time sensitive nature o…

So GS is primarily the go-to since they're willing to leisurely unload stock they bought at a discount and they've got the cash in hand to do so. Makes sense.

Re: Trading Program Ran Amok, With No ‘Off’ Switch

#23

Post by jonah »

teekarja wrote: post #20

Strange article. Lots of text but missing the main thing I was looking for. What kind "erroneus trades"? where did the money go? If you buy stock at the market you did not intend to buy, why not just sell them the next day?

Seems like maybe they couldn't hold on to the stock for long enough to unload the enormous volume they were dealing with. It sounded like at one point they were doing AS MUCH VOLUME AS EVERYONE ELSE on the exchange combined.

http://news.ycombinator.com/item?id=4337750

Re: Trading Program Ran Amok, With No ‘Off’ Switch

#25

Post by izaidi »

svdad wrote: post #15

What I wonder, following this story this week, is how the software quality controls at a place like Knight compare with those for life-critical systems like those in, e.g., aviation. On one hand, you'd think the QA in finance would be pretty solid, considering that the survival of the company could be at stake (witness Knight). On the other hand, I have a feeling that even there, people just don't take it that seriou…

Unlike high-frequency trading, aviation is highly regulated. In the United States the FAA specifies pretty detailed development standards for avionics software (e.g., DO-178B: http://en.wikipedia.org/wiki/DO-178B). We're unlikely to see similarly strict requirements for financial software anytime soon.

Re: Trading Program Ran Amok, With No ‘Off’ Switch

#26

Post by lostlogin »

rorrr wrote: post #5
nmcfarl wrote: post #2

They lost $440 million (and amount greater than their market cap), and possibly the company, on what the world knows to be incompetence. At some point if I couldn’t stop it - I’d be tempted to just kill the power to the server rooms, all of them. There just has to be a way to cut your losses.

It happened very quickly, after years of operations. Technically, it can take seconds to lose that much. What they did wrong is do all their trading with the same algorithm. Way to put all eggs in one basket.

It wasn't after years of operation. The article states that the system was brand new.

Re: Trading Program Ran Amok, With No ‘Off’ Switch

#27

Post by robryan »

jkimmel wrote: post #14
jonah wrote: post #9

"Knight is also working with Goldman Sachs to help unwind the trades behind its extensive loss, according to people briefed on the matter. "Goldman has agreed to buy, at a discount, the shares that the trading firm had accumulated. Such a move would help Knight by taking the portfolio off its hands and freeing up capital." What does this mean? Why would GS do this? Why would Knight do this? Couldn't they just sell th…

Yes and no. Given the kind of volume Knight purchased during the faulty trades, it could be difficult to offload that many shares on the open market in a timely manner. Maybe those stocks are hot Monday, maybe they're not. Knight needs capital yesterday to keep floating, so they're likely looking to sell everything in one basket. As for GS's motivation, they're buying at a discount. Due to the time sensitive nature o…

Would be interesting if Goldman also made a stack off the original trades.

Re: Trading Program Ran Amok, With No ‘Off’ Switch

#28

Post by jussij »

forgotusername wrote: post #7
nmcfarl wrote: post #2

They lost $440 million (and amount greater than their market cap), and possibly the company, on what the world knows to be incompetence. At some point if I couldn’t stop it - I’d be tempted to just kill the power to the server rooms, all of them. There just has to be a way to cut your losses.

I'd love to know what qualifies you to throw a word like incompetence around here. My best guess is the reason it took 45 minutes to shut it off was due to a judgement call: burn through free cash, or take out all their customers too. Bear in mind some of the largest retail brokerages in the world hang off Knight. Their primary functions are acting as an order destination and a market-maker, for efficiency's sake an…

> I'd love to know what qualifies you to throw a word like incompetence around here.

I'm not sure what other word you could use. Total stuff maybe?

> So given the choice of taking a cash hit (a potentially short term affair), or a reputation hit (a much longer term and most likely fatal affair), it's entirely possible Knight knowingly made the right decision.

Except thanks to their competence they have taken a massive cash hit and their reputation lies in tatters.

I suspect the damage to their reputation is so bad they will be lucky to survive.

Re: Trading Program Ran Amok, With No ‘Off’ Switch

#29

Post by AncientPC »

svdad wrote: post #15

What I wonder, following this story this week, is how the software quality controls at a place like Knight compare with those for life-critical systems like those in, e.g., aviation. On one hand, you'd think the QA in finance would be pretty solid, considering that the survival of the company could be at stake (witness Knight). On the other hand, I have a feeling that even there, people just don't take it that seriou…

I can't find the links at the moment, but some HFT guys have responded to relevant Slashdot articles over the years.

From what I remember from those accounts, traders often like to tweak algorithms at the last second and there is little to no QA before changes gets pushed live.

It's sort of a byproduct of the necessity for speed. Algorithms are quite complex, and even running a basic test suite that takes a few minutes may be deemed unnecessary.

Re: Trading Program Ran Amok, With No ‘Off’ Switch

#30

Post by pheon »

fsckin wrote: post #12

I would rarely suggest this, but if something is so incredibly broken that you're loosing money at a rate of 800 million dollars per hour, screw the customers. Turn it off at any cost. If you are forthcoming and transparent, customers will understand.

Point is you dont know what the loss is.

1) They bought too much stock (incorrectly)

2) realized WTF, stopped everything

2a) more likely their clients said WTF is wrong first

3) had to sell the stock for the rest of the day.

Its only after they sold everything did the $440MM price tag surface. Hopefully they sold most of their positions to goldman (instead free market) so one of their investors made a boatload of cash.. giving them favorable terms for a line of credit.

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