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Trading Program Ran Amok, With No ‘Off’ Switch

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

#51

Post by wtracy »

jonah wrote: post #48
iskander wrote: post #42

Earlier quoted context omitted.

They weren't taking long-term speculative positions, their short-term market making had a major bug in which instead of buying low and selling high it was doing the opposite (thus losing a small amount on each pair of trades). For more details read Nanex's blog ( http://www.nanex.net/aqck2/3522.html ). So, they launched a busted market making algorithm, lost a ton of money and no one is going to bail them out.

And the nanex guess at why it happened: http://www.nanex.net/aqck2/3525.html

"We think the two periods of time when there was a sudden drop in trading (9:48 and 9:52) are when they restarted the system. Once it came back, the Tester, being part of the package, fired up too and proceeded to continue ..."

Ouch!

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

#52

Post by wtracy »

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.

Another thread here has a link to a blog post with (admittedly speculative) evidence that, at two different times, they tried rebooting the system only to have it come back up and start making random trades again.

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

#53

Post by grn »

0x0 wrote: post #49
retube wrote: post #46

Earlier quoted context omitted.

this is issue nothing to do with speculative trading. Knight is a broker. They provide an interface to the market for retail brokers, spread betting outfits and so on. Their algos execute orders placed by their clients. Their new algo had a bug. That's it.

I don't know the details of retail brokers vs HFT, but this writeup http://www.nanex.net/aqck2/3522.html has a lot of charts showing trades with 25 millisecond intervals. Just looking at things in a big perspective, the fact that the system is designed for allowing trades at such frequencies makes it seem like markets these days no longer exist for the benefit of the listed companies. Then again, maybe I don't know w…

Christ Stucchio wrote a HFT apology: http://www.chrisstucchio.com/blog/2012/hft_apology.html

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

#54

Post by wglb »

wpietri wrote: post #35
izaidi wrote: post #25

Earlier quoted context omitted.

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.

But don't you think the existence of regulation influences the culture?

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

#55

Post by asmithmd1 »

0x0 wrote: post #49
retube wrote: post #46

Earlier quoted context omitted.

this is issue nothing to do with speculative trading. Knight is a broker. They provide an interface to the market for retail brokers, spread betting outfits and so on. Their algos execute orders placed by their clients. Their new algo had a bug. That's it.

I don't know the details of retail brokers vs HFT, but this writeup http://www.nanex.net/aqck2/3522.html has a lot of charts showing trades with 25 millisecond intervals. Just looking at things in a big perspective, the fact that the system is designed for allowing trades at such frequencies makes it seem like markets these days no longer exist for the benefit of the listed companies. Then again, maybe I don't know w…

Check out this TED talk about how these algos. are actively changing the surface of the planet:

http://www.ted.com/talks/kevin_slavin_how_algorithms_shape_o...

The speaker makes an arguement that no one can understand how these algos. interact and are being studied like natural phenomena.

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

#56

Post by yummyfajitas »

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…

Huh? Knight Capital lost a bunch of money, and will likely go bankrupt. Essentially, Knight's software bug transferred a bunch of money from Knight to everyone else. This poses minimal systematic risk to anyone else, and they will almost certainly get no bailout.

The markets have already recovered. The S&P was down a little bit on thurs and recovered by friday. Knight is down 60%.

http://www.google.com/finance?q=INDEXSP%3A.INX%2C+NYSE%3AKCG

This is ultimately a situation of the market being a robust and stable dynamical system.

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

#57

Post by forgotusername »

fauigerzigerk wrote: post #21
forgotusername wrote: post #7

Earlier quoted context omitted.

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…

They had >= $300m free cash as of June, that's how I arrived at the $100mish deficit.

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

#58

Post by beagle3 »

SagelyGuru wrote: post #39
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. Th…

That's not what happened, according to nanex.

It just kept making markets in reverse (instead of joining the bid and the offer, it bid on the offer and offered on the bid).

Nanex speculates that Knight ran their tester software on the real market (the tester losing money on purpose to the main algorithm). Alternatively, it could simply be a bug that sends a bid instead of an offer and vice versa. One bit flip at the wrong place could cause that.

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

#59

Post by forgotusername »

jussij wrote: post #28
forgotusername wrote: post #7

Earlier quoted context omitted.

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 massiv…

> their reputation lies in tatters

Most of the brokerages who routed elsewhere last week were back using them as of Friday.

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