…you can make an error that would have taken you years to do by hand. Did a software problem clobber Knight Capital?
In early July, the New York Stock Exchange (NYSE) received SEC approval for a new program called the Retail Liquidity Program (RLP). The program, which was slated to kick off on August 1st, would allow retail traders to get access to better pricing on stock. The specification for the programme had been around for less than a year but a lot of wall street firms had planned for its implementation.
There was some controversy when the announcement was made but all market makers started preparing for the launch, realizing that this may be another tool to fight the competition and that those who were not ready by launch time could risk losing out precious advantages in the market.
Knight Capital, as one of the largest players in the market, decided that it would provide that capability to its customers as soon as it became available and that it would take advantage of the price differential for its own trading. With only a few weeks from the announcement to the release, internal development teams must have burned the midnight oil to get this in place by the August 1st deadline.
But on Wednesday morning, Knight Capital may have made a mistake that could cost it its exisÂtence. According to reports, the company had just finished upgrading its software to the newer version, allowing it to take advantage of the RLP.
When the NYSE opened, trades on as many as 114 companies started running at higher than expected volumes. Here’s how the New York Times describes what happened next:
A New York Times analysis of New York Stock Exchange volume on Wednesday morning showed that during the first minute of trading there was 12 percent more trading in all stocks than there had been on average during the previous seven days. By the third minute of trading there was 116 percent more trading than the previous week’s average. The differÂence reached a peak at 9:58 a.m., when the volume was six times greater. After that, tradÂing volume fell off sharply, nearing the recent average at 10:15 a.m.
[…]
Once the problems began, many traders said it would have made sense if the firm’s employees had not caught the problems for the first minute or so, given the speed at which Knight’s program was firing off orders. After that, though, the problems were visible for all to see.
In under an hour, the company had lost $440 million, $75 million more than all the cash it had in its reserves, or more than it had made in profit for the previous year. Customers, wary of sufferÂing from the bug, decided to start trading through other firms. By Thursday, a number of brokerÂages and broker-dealers (TD Ameritrade, Scott Trade, Fidelity Investments, Vanguard Group, E*Trade and Pershing LLC, a division of BNY Mellon) suspended routing trading orders through the company. A few came back but not all.
Who could have anticipated buggy software? This is why the robots will fail. They must operate using software written by humans. Robot written would be derived from human written software.
While I do not wish a company to fail, this incident illuminates the way these folks operate, and if you play with snakes, you should expect to get bitten.
@jan
“Be afraid, be very afraid.” This is what you and your husband are up against. The stock market is a rigged game, and the objective is to part you and your money. These people are hustlers, and anybody who tells you otherwise is a sucker or a hustler.
Not only that but the software is written with tools and operates in environments that its authors don’t understand and over which they have no control.
I don’t know anything whatever about stock trading software today. I do know about CBoE software of years ago. It was written in COBOL and running on IBM mainframes. I suspect that today’s software is written in Java and running under commercial operating systems, i.e. rather than handcrafted in assembly language and running in custom operating environments.
@Tasty- There have been a number of articles out on how the retail trader is hosed when it comes to competing with the big traders. Analysts are now shills.
Steve
Steve
It’s not even that the analysts are shills. A retail trader simply does not have the information and/or real time information to compete.
This brings me to an editorial comment. The efficient market hypotheses, championed mostly by Gene Fama at my school, is often miss characterized as a theory that says the “market is right” or that the “market is rational.”
I took Famas class, I know what he thinks, and neither of those are really it. The EMH really says that the market processes information almost instantaneously- rightly or wrongly, rationally or irrationally (although there is is a presumption that these people are not on crack and at least attempt to process information rationally) .
The result is your point, Steve, that if you think you are going to out information those who are in the business of information, you have another thing coming.
My wife once worked for the guy labeled the father of momentum investing in The New Investment Wizards. His style was simple. He developed a stable of investment ideas he thought worthy. Then he had umpteen real time information services and watched the tape religiously until he felt the market agreed on this one or that one. Then he jumped on the momentum. A retail investor had no chance. just no chance.