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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

#31

Post by Devilboy »

jonah wrote: post #23
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

Since there's 2 parties to every trade doesn't that make 50% the limit?

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

#32

Post by SagelyGuru »

'Prediction is difficult, especially with regard to the future'.

It looks like they were using some new algorithm, which should have made them a lot of money, had the market gone up after their massive purchases. In that case, they would have pocketed fat bonuses and would not be on the news.

However, it has not happened, so the crying and the search for a scapegoat is on. It sounds like the case of the banking business as usual: 'heads I win, tails you lose'.

Ultimately, there is a really serious problem with the concept of limited personal liability for companies engaging in speculation. It is an assymetric arrangement, whereby the directors are entitled to the profits but are never personally responsible for the losses. With such rules of the game, it is advantageous to take crazy risks. Expect to see a lot more of this and many more taxpayer funded bailouts.

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

#33

Post by wpietri »

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 could buy that they competently made the best of a bad situation. But I have a hard time believing that getting into the situation was the result of perfect competence.

My time writing trading software was never on the automated end of things, so I'm only modestly qualified to comment. But if I were doing the post-mortem on this one, the first thing I'd look for is middle management time pressure forcing a large release without adequate testing. And my standard for "adequate testing" would be pretty high.

If you're going to release something that can take down the company, it's worth making sure it works. In this case, they lost circa 400x the lifetime median income of a US worker. It's hard to imagine the upside that would have justified that kind of risk.

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

#34

Post by thibaut_barrere »

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 tell first-hand that it depends on the places: some have fairly clean tests including fuzzy testing on trading automation, while other have, well, "fix it when it fails in production".

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

#35

Post by wpietri »

izaidi wrote: post #25
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.

Having talked with people who write life-critical code, the regulation isn't really what makes it safe. Safety comes from good engineering.

The regulation just makes it much harder to bring an unsafe product to market, and makes it clearer who to blame when people die.

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

#36

Post by bagosm »

So, some of the owners were looking for a way out, and magically this thing broke loose and started giving away (basically) free money to undisclosed receipients. In the meantime all the technicians were fast asleep and couldnt kick the machines down or something, while they were losing milions of dollars per minute. This article is a completely honest recap by completely honest people, about completely honest traders/bankers (bankers are not people).

Edit: on a COMPLETELY unrelated note, trading firms/banks are known to actively pursue the extraction of money from their clients with bogus trades/advice http://www.nytimes.com/2012/03/14/opinion/why-i-am-leaving-g...

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

#37

Post by justincormack »

SagelyGuru wrote: post #32

'Prediction is difficult, especially with regard to the future'. It looks like they were using some new algorithm, which should have made them a lot of money, had the market gone up after their massive purchases. In that case, they would have pocketed fat bonuses and would not be on the news. However, it has not happened, so the crying and the search for a scapegoat is on. It sounds like the case of the banking busin…

They were not taking big positions expecting the market to go up, they appear to largely have been burning money buying and selling fast.

There is no government money involved.

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

#39

Post by SagelyGuru »

SagelyGuru wrote: post #32

'Prediction is difficult, especially with regard to the future'. It looks like they were using some new algorithm, which should have made them a lot of money, had the market gone up after their massive purchases. In that case, they would have pocketed fat bonuses and would not be on the news. However, it has not happened, so the crying and the search for a scapegoat is on. It sounds like the case of the banking busin…

Of course, buying high and selling low is always the 'reason' for making a loss. In this case, I think the program caught itself out by manipulating the market, which it perhaps naively assumed to be non-manipulable.

In other words, it was creating so much volume that, when buying (or selling), it made the market go up (or down). It was then reading the price as going up (or down) and jumping on its own bandwagon. This, of itself, would create growing oscillations in the market and growing losses.

For this to work for you, you need to first create a trend and then sit back and let the suckers pile in on it and take the losses. You then return only when you want to reverse the trend again, at a profitable level (for you). I suspect the program was just too fast for its own good and not a match for the human Masters of this art.

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

#40

Post by ewood »

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 have experience in HFT, there are similarities to market making and I have plenty of colleagues who've worked in market making. Just like any company the culture is largely dependent on those in charge. Founders of these companies fall into three buckets - traders, techies, and mathematicians/physicists - and quality control will generally be a function of the founder mix. Mostly techies: strong software culture, unit testing, realtime monitoring. Mostly scientists: strong algos, software that works, monitoring varies. Mostly traders: risk v reward is the driver, software quality is unimportant unless it affects short-term profit, monitoring is unimportant - dollars and cents are sufficient.

Obviously every firm's goals are driven by the goals of those in control. In the case of Knight they are largely a trader driven firm that has arrived late to the algo party. They were looking to get ahead by being one of the first market makers on the NYSE's new retail order matching system and probably cut some corners to get there. From a risk v reward perspective it probably looked like a good bet - with no major competitors customers would flood in and any bugs could be ironed out in live. Unfortunately the 'fat tail' (http://en.wikipedia.org/wiki/Fat_tail) struck and it may have sunk their company.

For a closer look at what went wrong see http://www.zerohedge.com/news/what-happens-when-hft-algo-goe...

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