$10 million a minute.
That’s about how much the trading problem that set off turmoil on the stock market on Wednesday morning is already costing the trading firm.
The Knight Capital Group announced on Thursday that it lost $440 million when it sold all the stocks it accidentally bought Wednesday morning because a computer glitch.
The losses are threatening the stability of the firm, which is based in Jersey City. In its statement, Knight Capital said its capital base, the money it uses to conduct its business, had been “severely impacted” by the event and that it was “actively pursuing its strategic and financing alternatives.”
The losses are greater than the company’s revenue in the second quarter of this year, when it brought in $289 million.
Just more proof that the stock market is no longer about the efficient allocation of capital but just legalized high-tech gambling.
butler
Except gambling has rules which are transparent and vigorously enforced.
Shawn in ShowMe
Cole, that’s the price of living in a computer-dominated society. The stock market was a gambling casino long before the rise of online trading. But when you’ve got a legion of Herbie the Robots running the show, the potential damage is a lot greater.
MattF
This is an amazing story. I’m betting that the different high-frequency-trading-neural-network programs are all optimizing to take advantage of each other’s bugs. If you can profit because the other guy is pushed off a cliff, well…
KXB
@butler:
And casinos pay their taxes.
The Moar You Know
I suspect the software worked as designed. Some Master Of The Universe fat-fingered an entry while watching the Olympics and voila – there goes the company.
PeakVT
Financial transaction tax, anyone?
Shawn in ShowMe
That’s the price of living in a computer-dominated society. The stock market was a gambling casino long before the rise of online trading. But when you’ve got a legion of Herbie the Robots running the show, the potential damage is a lot greater.
Spaghetti Lee
My aunt works at the post office. Every month she has someone inspect her cash register to make sure she’s giving the right amount of change. If she’s more than ten dollars below, she has to pay for it out of her own pocket.
What do you think the odds are that the management at Knight Capital will be paying for any of this out of their own salary?
Maude
Hal is still around.
Can you imagine the look on their faces when they realized what had happened?
LanceThruster
Sounds like baby fucking needs a new pair of shoes.
Shawn in ShowMe
test
amk
Karma – such a sweet beeyotch.
Shawn in ShowMe
That’s the price of living in a computer-dominated society. The stock market was a gambling casino long before the advent of online trading. But when you’ve got a legion of HAL 9000s running the show, the potential damage is a lot greater. “I have some bad news to tell you, Dave …”
LanceThruster
@butler: Though in the gambling world, if you’re too good or too successful, or use strategies that do not depend on anything but your own mind (such as card counting without any device), you can still be barred, banned, beat up, and otherwise sanctioned.
In that way they are just like the banksters in that they can apply any goddamned rules the like.
Roger Moore
These are the genius, infallible stewards of our economy. They can be trusted implicitly and will be impossibly hampered if the government steps in and regulates them in any way. Damn, I almost managed to say that with a straight face.
Felanius Kootea
@Spaghetti Lee: I think the Knight employees would rather have each American chip in roughly $1 million to cover their losses. It’s only fair to socialize the losses. After all it is expensive to develop that software and impossible to do software quality assurance testing before deploying because financial software employs
genetic algorithms, neural networks, Bayesian networks, support vector machines,some complex voodoo shit that no one can understand.Judas Escargot, Acerbic Prophet of the Mighty Potato God
Less than 15% of trades are done by humans now.
We’ve already reached the point where all those sweaty, screaming bros on the Dow Jones floor are just for show.
Dennis SGMM
It’s comforting to know that there is no way that these programs could possibly start a massive sell-off that would cascade through the system faster than the so-called circuit breakers could stop it.
DC Refugee
I’m wondering if maybe someone like Anonymous plans to hack some brokerages and this was a trial run. Too much awesome if it spread to other brokerages and hit during the GOP convention.
One can hope…
DCr
SFAW
@Dennis SGMM:
Does Cole have a “What Could Possibly Go Wrong?” tag?
Mary
Isn’t this more or less how The Dark Knight Rises began? Just minus the shooting and killing.
Punchy
I smell a bailout on the horizon.
Perhaps a….wait for it….Knight rider…on the next spending bill?
Anoniminous
@The Moar You Know:
The software worked as written.
A distinction I’ve spent decades investigating.
Dennis SGMM
@Punchy:
The current House Majority would not get that one.
Grumpy Code Monkey
@Anoniminous:
To err is human, but to really fuck things up you need a computer.
NonyNony
I object to this base libel.
Casinos would never allow the equivalent of a high volume trading computer near one of their tables.
They’re too smart to let that happen.
BBA
@Spaghetti Lee: Knight’s stock was trading at $10 a share on Tuesday. Today it’s $3. Everyone at Knight who received stock bonuses just got a retroactive 70% pay cut.
Lurking Canadian
@BBA: No problem. They’ll just retroactively retire to before the stock dropped and recover!
Martin
I wonder how much code is shared between the trading app and a WOW bot? Maybe we should just simplify this, shut down the stock markets, and just let JP Morgan grind for xp and gold harvest for profits?
slippy
People who don’t understand computers don’t understand the computer will do EXACTLY WHAT YOU TELL IT TO, only 1,000,000,000 times faster than you can even imagine, and if it’s a catastrophic error, it will be 1,000,000,000,000 times worse than you are prepared to handle.
Now, couple that huge power and risk with the arrogance and fuck-wit-stupid of the average Wall Streeter, and well, there you go.
This SHOULD be solved by a fairly sizeable financial transaction tax. That way, these idiots will have to pick and choose carefully what to do next, and we the public will benefit from excessive greed.
Mrs. D. Ranged in AZ (formerly IrishGirl)
@Shawn in ShowMe: It’s not just that though. Computers are only as good as the business process in which they function. How hard is it really? They could establish a rule that says any automated purchase over a certain amount or over a certain percentage of a companys revenue must be recorded (and those syocks reserved) but not finalized for a sufficient amount of time to allow a person to review and authorize it. It’s not rocket science. They just don’t want to slow down and take the time to ensure quality. They want to gamble as much as they can, as fast as they can.
PopeRatzo
The derivatives market is worth approx $791 TRILLION. That’s like twenty times the GDP of the entire world.
The “stock market” has nothing to do with capital any more.
a hip hop artist from Idaho (fka Bella Q)
@NonyNony: That’s the total truth.
Roger Moore
@Mrs. D. Ranged in AZ (formerly IrishGirl):
The problem is that isn’t what they want. The whole point of having computers is to let you make decisions faster than any human can so you can take advantage of transient changes in market conditions. If you require a human to step in and confirm what the computer is doing, you’re undermining the whole point of the computerized systems.
It’s basically an arms race. If one firm has computers and nobody else does, then the computerized firm will be able to make a killing by taking advantage of its faster decision making ability. So everybody has to get computers so they don’t get killed. You wind up with a situation where nobody is any better off than they used to be, and maybe they’re actually worse off than they were because of the risk of the computer going off the rails, but nobody can give up their computer system because they’ll be absolutely murdered by the companies that stick with them. The only solution is to end the arms race by deliberately introducing big enough delays into the system that raw speed is no longer a critical advantage.
NonyNony
@slippy:
Oh, it’s ever so much worse than that. (At last, something I actually have some knowledge about).
These “high volume trading” programs that they’re talking about? Applied artificial intelligence. Typically either some kind of statistical model, neural network model, or other data-driven model. They can execute trades at the fastest possible allowed speeds, and they can make decisions on millisecond fluctuations in trade volume.
So it’s actually worse than you imagine. They aren’t just doing what they’re told – they’ve learned how to do things based on observations in the data. And they’re processing trades faster than anyone can check them.
And they’re completely legal. Despite the fact that their only purpose is to game the system in an obvious way.
Which is one of the many reasons why I think comparing Wall Street to a casino is actually unfair to the casinos.
MikeJake
You hippies just don’t seem to get it. The market is efficiently allocating capital to worthy companies…every millisecond. Through the magic of computers, society is better off most milliseconds.
Now, granted, we occasionally have a bad millisecond. And a few seconds of the market’s favor is probably of no practical benefit to the recipient. But just think of the liquidity!
Jay in Oregon
@Mrs. D. Ranged in AZ (formerly IrishGirl):
The whole point of the high-frequency trades is to flip stocks back and forth to take advantage of even miniscule fluctuations in the stock price.
If you have 4,000,000 shares in a company and can flip the stock to take advantage of a 2-cent change in price, that means you just made $80,000. Do that 5 times a day, and that’s now $400,000. Do that to 20 stocks a day…
HFT is so out of control that trading firms have built their own datacenters and network infrastructure as close as possible to the exchange to be able to shave milliseconds off of the response time. MILLISECONDS.
That is not “efficiently allocating capital” or “creating jobs” or whatever. It’s playing with numbers and it should be illegal, or at least taxed to the point where it’s barely profitable.
Roger Moore
@Jay in Oregon:
FTFY. If it’s barely profitable, they’ll just do more of it. If you want to end high speed trading, you need to set the rules so that only real trades can make money after the tax.
El Cid
I can only imagine how much the CEO is suffering for this; only a super-large bonus in the billions of dollars can assuage such a hurt jobcreator’s feelings.
NonyNony
@Jay in Oregon:
My comment is awaiting moderation – but Jay is completely correct. This is basically using artificial intelligence to game the rules to suck money out of the market. It’s a more sophisticated scheme than the one used by Richard Pryor in “Superman III” to skim fractional pennies from bank accounts (also seen in “Office Space”), but it’s similar in concept.
It’s completely legal. And also completely useless to anyone except the folks exploiting the system to make money. The only reason this kind of practice hasn’t been shut down is because the big investment banks are doing it too – and they make a metric fuckton more money off this practice than anyone else does.
Jay in Oregon
Maybe someone can loan it several hundred million dollars, then take it back half a second later.
Jay in Oregon
@Roger Moore:
Enh, I’d be okay with a 95% tax rate on HFT. But stopping altogether would be fine, too.
low-tech cyclist
@PeakVT:
Hell, yeah. This sort of computerized clowning around is EXACTLY why you want a FTT. Tax each transaction at even 1/10 of 1%, and it’s going to make a lot of this electronic skimming a lot less attractive.
I’d be interested to see if anyone’s done any projections on just what levels of FTT reduce trading volume by what percentage.
The Red Pen
I worked briefly writing code for a trading outfit. It was a big one. You may have heard of it: JPMorganChase.
That was nearly 10 years ago, and I have yet to encounter anyone with lower technical competence than that group.
For example, they had a level of programmer who had been elevated to some sort of world-wide guru/architect/genius/whatever. On of these geniuses informed me that our programs were to have no more than 4 threads. We had 4 CPU cores, so if you had more than 4 threads, the additional threads would just compete for those CPUs; in order to keep those threads running all the time, you should only have one per CPU. I told him that was nonsense because our threads spent most of their time waiting on I/O. If we have 100 threads and they are all waiting for data from disk or from the network, then we will be using zero CPUs. That observation didn’t go over well.
Like I said, I worked there briefly.
Bottom line, I’m stunned this hasn’t happened sooner or to someone much, much larger.
PeakVT
Where are the anti-FTT trolls today? Maybe they’ve been told to lay low for a day or two.
Jay in Oregon
I’m glad to see that the NYSE isn’t going to let them reverse those trades (at least, not easily).
That’s how the stock market works, bitches. You plays your money and you takes your chances.
If you make a trade at an inopportune moment, whether it’s due to an algorithmic error or because someone swapped the crop report on orange harvest yields for a fake one, you should have to eat the failure.
Here’s a crazy thought; maybe 70% of the stock trading volume shouldn’t be based on computer programs that are too complicated to debug and execute too quickly to undo? That might restore some confidence in the market…
LanceThruster
@MikeJake:
Ford Prefect: So, the hours are good, are they?
Vogon guard: Yeah. Though now you come to mention it, most of the actual minutes are pretty lousy. Except some of the shouting I quite like: “Resistance is…”
Ford Prefect: Yeah, yeah, yeah. You’re good at that. I can tell
edmund dantes
I’m still waiting for someone to pull the Debt of Honor/Executive Orders trick (scary couple of books when you consider what’s happened from them planes/financial crisis).
You’d probably be able to pull off the massive sell off without even having to do the computer virus to wipe out the trade data. Since you could potentially game the algorithms to trigger cascading sell offs. They even point out in the book that it was mistake since it just allowed Jack to order the day to start over from where it started to go crazy.
It’s worse when everyone knows where the money is since every bank would fight to keep their gains.