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?
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."
Yes, the SEC is arguing that more monitoring and control is required of automated trading systems in order for them to be considered truly capable of making and sustaining market activity without fear of this kind of glitch, which not only throws markets into confusion, but undermines investor confidence -- not a good thing in these tough economic times.
I had heard about the automated software being used in the trading business from one of my friends. I always believed that if we have such software we could make good bucks, but this article brought to my focus about the failures of such systems and cautions before venturing into such business.... Thanks.
One already in use involves so-called electronic circuit breakers, or software that automatically halts trading when too much volatility is detected.
That said, the Markets have the Electronic Circuit Breaker monitoring the trades/volatality of a particular scrip, why doesn't the automated software itself doesn't handle the volatility and break the trade.... Some work is needed by such software development teams....
Part of the unstable measure of things is probably the small number of players.
As the number of agents (bots, companies with bots and people investing in companies with bots) grows, there is likely to be some kind of swarm stability where an errant bot is quickly weeded out (and perhaps punished financially).
CHAIRMAN SCHAPIRO STATEMENT ON KNIGHT CAPITAL GROUP TRADING ISSUE Washington, D.C., Aug. 3, 2012 – Securities and Exchange Commission Chairman Mary Schapiro today made the following statement: The apparent trading error by Knight Capital Group on Wednesday reflects the type of event that can raise concerns for investors about our nation's equity markets – markets that I believe are the most resilient, efficient, and robust in the world.
Reliance on computers is a fact of life not only in markets everywhere, but in virtually every facet of business. That doesn't mean we should not endeavor to reduce the likelihood of technology errors and limit their impact when they occur.
While Wednesday's event was unacceptable, I would note that several of the measures we instituted following the Flash Crash helped to limit its impact. Recently-adopted circuit breakers halted trading on individual stocks that experienced significant price fluctuations, and clearly defined rules guided the exchanges in determining which trades could be broken giving the marketplace certainty.
In addition, existing rules make it clear that when broker-dealers with access to our markets use computers to trade, trade fast, or trade frequently, they must check those systems to ensure they are operating properly. And, naturally, we will consider whether such compliance measures were followed in this case.
As with every significant incident of volatility that occurs in our markets, we will continue to review what happened and determine if any, additional measures are needed. That process has already begun.
In particular, I have asked the staff to accelerate ongoing efforts to propose a rule to require exchanges and other market centers to have specific programs in place to ensure the capacity and integrity of their systems. And I have directed the staff to convene a roundtable in the coming weeks to discuss further steps that can be taken to address these critical issues.
I don't think you can fight speed. If anything these systems will get faster and trade with more volume over time.
Although we think of business as fast moving, the financial systems that monitor and score business are practically Druidic. Quarterly reports. Annual Reports. Ah, Merlin, the Sun has risen over the Heel Stone...how much have we earned this season?
Ideally I should press a button and know the asset valuation of a company instantaneously. So, these trades, which are a measure of companies worth only at IPO or birth are just the beginning.
Wow, the issue of large and complex systems management seems to be a science in its own right. I can see why. The various protective mechanisms are starting to be supported on trading systems, but clearly it's not yet sufficient to keep disaster at bay.
This precise issue is discussed in an excellent paper -- "Large-Scale Complex IT Systems" in the July 2012 isssue of Communiciations Of the ACM. The argument is that interactions between independently developed complex systems pose accelerating threats to financial markets (and other similarly IT-dependent collaborative enterprises). Systems will increasingly need defensive capoabilities based on an assumption of partner fallibility. This will change the way in which large scale IT has to work.
What bothers me is the frequency with whihc the reaction to systematic failure is a call for regulatory action ... whereas the technology changes faster than the processes cna accomodate, and the processes change fatser thahn regulation can address.
Chris is probabaly right ... Knight will disappear ... but that's probabaly what should happen. The penalties for failure may be the only way to drive improvement ... a sort of Internet Evolution if you like!
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