Observers are once again questioning the reliability of high-volume trading technology -- and the people who run it.
This time, Knight Capital suffered an expensive glitch Wednesday when its systems issued "erroneous orders" to the market, distorting results and forcing Knight to make good on many false trades. Knight could lose $440 million from its bad morning yesterday.
The market-making financial firm blames the malfunction on software.
The problem is reminiscent of the woes that hit Nasdaq OMX in May, when trading applications bollixed the system during Facebook's IPO. That particular snafu brought a hail of criticism raining on Nasdaq, some of it from Knight CEO Thomas Joyce, who perhaps regrets the force of his anti-Nasdaq diatribe.
There are fresh memories of other trading systems gone wrong: In March this year, an electronic exchange, BATS Global Markets, experienced "technical issues" on the very day it was set to trade its own IPO shares. The humiliated company withdrew its IPO and suffered renewed scrutiny of its big fail when Nasdaq OMX tanked two months later.
Perhaps the worst memory is of the "Flash Crash" of May 2010. The problems that day were kicked off by slowness in a system from automated trading firm Arca, which sent a ripple of price flaws through numerous markets, resulting in record declines for the Dow Jones Industrial Average.
"The whole system failed," John Bogle, founder of the Vanguard Group financial firm, told the Wall Street Journal. "In an era of intense technology, bad things can happen so rapidly. Technology can accelerate things to the point that we lose control."
So what can be done to avoid failure of systems that carry the weight of the world's economies on their virtual shoulders?
There are many suggestions. One already in use involves so-called electronic circuit breakers, or software that automatically halts trading when too much volatility is detected. These mechanisms reportedly need some work to be more effective. The US Securities and Exchange Commission also advocates other automated measures to alleviate risk that have not been put into widespread effect.
But as any IT professional knows all too well, problems with systems are also problems with people -- people who don't test software adequately, who expedite instead of focus thoroughly, who allow complex systems to rule the markets.
"We're losing the human control in our business," financial consultant Joe Anastasio of Capco told the Vancouver Sun newspaper. "We've been so focused on automated throughput of orders and high-volume execution with no human intervention that we have lost the human logic factor when things go wrong."
— Mary Jander , Executive Editor, Internet Evolution