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=INDE…
Yes, no risk to others unless you happen to be one of their newly acquired futures broker unit's customers with $411 million in deposits. http://www.reuters.com/article/2012/08/02/knightcapital-regu...
Did you read the article you just linked to? Penson's customers have their money in accounts completely segregated from Knight's electronic trading division.
"It isn't like we found out that Knight was stealing money," Sommers [a CFTC commissioner] said.
The CFTC is just watching carefully to make sure it stays that way.
Yes, no risk to others unless you happen to be one of their newly acquired futures broker unit's customers with $411 million in deposits. http://www.reuters.com/article/2012/08/02/knightcapital-regu...
Did you read the article you just linked to? Penson's customers have their money in accounts completely segregated from Knight's electronic trading division. "It isn't like we found out that Knight was stealing money," Sommers [a CFTC commissioner] said. The CFTC is just watching carefully to make sure it stays that way.
Yes, exactly, but it is still risk. They certainly haven't lost their money yet. If everything works out right, they shouldn't have to. But the financial world is much too complicated to say that there is minimal risk for any party, even if everything is in Treasury bonds.
Yes, no risk to others unless you happen to be one of their newly acquired futures broker unit's customers with $411 million in deposits. http://www.reuters.com/article/2012/08/02/knightcapital-regu...
Did you read the article you just linked to? Penson's customers have their money in accounts completely segregated from Knight's electronic trading division. "It isn't like we found out that Knight was stealing money," Sommers [a CFTC commissioner] said. The CFTC is just watching carefully to make sure it stays that way.
Moreover, I would suggest you read Johnson et al's research on mini-flash crashes (http://arxiv.org/pdf/1202.1448.pdf) if you hold that the markets are stable dynamical systems.
Did you read the article you just linked to? Penson's customers have their money in accounts completely segregated from Knight's electronic trading division. "It isn't like we found out that Knight was stealing money," Sommers [a CFTC commissioner] said. The CFTC is just watching carefully to make sure it stays that way.
Moreover, I would suggest you read Johnson et al's research on mini-flash crashes ( http://arxiv.org/pdf/1202.1448.pdf ) if you hold that the markets are stable dynamical systems.
How does this research suggest the market is unstable? According to these authors, the market was (in their view) dangerously perturbed 18,520 times, more than once per day. In spite of that, it remained stable. The flash crash took an afternoon to recover from. Knight took a day.
If you perturb a system over and over and each time it quickly swings back to equilibrium, that's pretty strong evidence it is stable.
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…
Your right, there are so many details we dont see beyond the attention grabbing headline were everybody will naturaly go and instantly think `but all systems have a off switch, you pull the ruddy plug out` and with such headlines I'll bet most people were thinking that before even reading the article. This and how loved people in any form of finance, with HFT being one of the most loved area's. But with the blame culture in many area's of life, there will be investigations and somebody will either chuck themselfs onto a sword or somebody will be blamed and made a scapegoat. It is all down to confidence at the company from now and nomatter if they did the right things or the wrong things it is that alone that will dicate the fallout. Sad in many ways. RIM being a classic case were the media have controled the stock price, which has controled the media that control the consumers that just ends up in a deadly spiral of self forfilling doom and gloom, nomatter how well or badly they actualy do. I'm sure there are better examples but as you said, its down to company image. Nothing to do with anything else and that alone is the most important thing as a years income is not a problem if your around for more years, if it looks like you wont then it starts to spiral badly.
This is an extreme example of what what can happen when what should be a software company thinks it is some other sort of company. I am sure they thought they were a trading company and software development was the necessary evil required to get things done.
Well 400 million odd dollars in the red later I doubt they still feel that.
I do feel sorry for them and they probably didn't deserve this huge loss. Hopefully valuable lessons can be learned.
Yes, no risk to others unless you happen to be one of their newly acquired futures broker unit's customers with $411 million in deposits. http://www.reuters.com/article/2012/08/02/knightcapital-regu...
Did you read the article you just linked to? Penson's customers have their money in accounts completely segregated from Knight's electronic trading division. "It isn't like we found out that Knight was stealing money," Sommers [a CFTC commissioner] said. The CFTC is just watching carefully to make sure it stays that way.
Actually, don't get me wrong. I think HFT is great (and I thought your HFT Apologist series was excellent). It reduces spreads greatly. There is nothing intrinsically wrong with prop firms, market makers, etc. But it is also an increasingly complex system and risk is part of the business. My meta-point (certainly not particular to Knight) is I don't think we understand all the consequences or the risks yet stemming from the fairly saturated and very competitive business, and the continuing arms race. There is also that unpredictable and fallible human component and how it reacts or affects the automated agents. There was even a paper on how as we approach zero, there may be brand new "relativistic" arbitrage opportunities: http://www.alexwg.org/publications/PhysRevE_82-056104.pdf. The Knight incident seems to me a reminder that there is much more to be done in risk management, more robust modeling, and defensive software development technologies in fintech. I don't know when the incentives will be there to invest in such things.
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, u…
Thanks for link. Given your experience, do you have any thoughts about a small circuit-breaker on every security that trips for, say any 3-standard deviation event?
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.
I don't blame anybody who thinks it's not as regulated as it should be but you might be surprised at how extensive the current requirements are. Storing ~200 million daily transactions in order to fulfill arbitrarily complex reporting specifications from SEC, FINRA, internal audit (rogue trading detection, etc.), not to mention analytics for other trading systems... Oracle/IBM/whatever enterprise big data provider gets the contract must be sending one gigantic fruit basket around Christmas time.