Knight's Algo Gets Off the Chain
When I saw the news yesterday that Knight Capital was directing customers to "trade elsewhere", my initial reaction was, "Jesus Christ, not another one stealing customer funds!?!" So I was almost relieved to find out that it wasn't theft but the rather more mundane occurrence of a high-frequency trading algorithm that got off its chain and started tearing shit up. It's a big mess for Knight, and in the half hour the algo ran amok before animal control put it down it appears to have affected more than 140 stocks.
The one that cracked me up was Wells Fargo preferred (NYSE:JWF). The stock normally trades 39,000 shares a day, but for some reason Knight's computers had a hard-on for it, because it clocked over 4.2 million shares traded in the first half hour and got pummeled 10%. Oops.
It's pretty easy for the anti-social cynic in me to see the humor in something like this, but in reality it isn't funny. These kinds of occurrences, which are happening more and more frequently, really undermine investor confidence in the markets. That, in turn, erodes liquidity, which is the main argument I always hear in favor of high-frequency trading.
Knight's shares dropped more than 20% after traders saw extreme volume spikes in a number of stocks, including preferred shares of Wells Fargo (JWF) and semiconductor company Spansion (CODE). Both stocks, which see roughly 100,000 trade per day, had changed hands more than 4 million times by late morning.
Anyway, here's Charlie Gasparino's take on what happened. Early in the morning he put forward the idea that it could have just been a "fat finger" fuck-up. Now he's hinting that Knight could have been hacked, which is a much much bigger deal:
And for those of you interested in the intricacies of what actually happened on an almost trade-by-trade basis, here's some excellent analysis:
What should be done about this? I see a couple of major potential problems here:
- Either a rogue algo went batshit and wreaked a bunch of havoc on the broader market, or
- Somebody hacked Knight and turned the algo loose
Neither scenario is good for the market.






Comments
My understanding was simply
My understanding was simply that an algorithm started going gorillas, not necessarily foul play of any kid, but I have no clue. We had problems with RadioShack in the morning thanks to KCG though, really funny story.
I hate victims who respect their executioners
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Honestly Eddie, I'm not
Honestly Eddie, I'm not convinced that these occurrences undermine the confidence of average people in the market. Frankly, most of the guys here on the desk didn't even know it happened until I mentioned it in the Afternoon. I only saw it because I happened to have one of my watch lists up and I noticed one or two stocks go bonkers briefly but then come back. That to me speaks volumes, though, that everything came back to order pretty quickly and strongly. The 'flash crash' undermines it because everyone saw the 600 points down and freaked out. I remember I was at the beach at the time and opened my phone and about dropped it. Then again that might not have been because of the markets but. My point is, I think these are tremendous issues and they need to be addressed but I'd wager the average person has no idea what happened or even that it happened.
Appears they lost 440million from this mess. As a note, KCG off 50% pre-market with losses "severely" affecting their capital position.
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Addinator: Appears they lost
Appears they lost 440million from this mess.
Good God! I had no idea the hit would be that large.
Even though Johnny Lunchbucket (and even a bunch of institutions) may have missed this, I think it speaks to the overall fragility that HFT inflicts on the market. Okay, so nobody knew this happened this time. What about the next time when an algo goes apeshit and trips circuit breakers and crashes the market?
I think we need to get on top of this shit pronto.
In principle, I see nothing
In principle, I see nothing wrong with algo-driven HFT. If your algo is wrong, you lose money (which Knight did). If it is right, you improve market liquidity. A risk reward trade-off, like any other business.
When these algorithms go off the rails, they can decrease market efficiency, making life worse for the rest of market participants. I'm not sure this alone warrants additional regulation- a lot of jobs can create negative externalities is mismanaged. Like if a newspaper publishes an inaccurate story.
To give an opinion on the regulation of HFT, we need to form on opinion on broader market regulation. Do we want it to be a strictly regulated public good, or take a free market approach? I am inclined to choose the latter- even if that means accepting some short term volatility. HFT is still a nascent field, and errors are inevitable. To stunt its development through excess regulation could make US exchanges less competitive.
I'll say I'm out of my depth here. I'm not a trader; somebody who saw a market undergo a massive change in regulation would know better.
Edmundo
Appears they lost 440million from this mess.
Good God! I had no idea the hit would be that large.
Even though Johnny Lunchbucket (and even a bunch of institutions) may have missed this, I think it speaks to the overall fragility that HFT inflicts on the market. Okay, so nobody knew this happened this time. What about the next time when an algo goes apeshit and trips circuit breakers and crashes the market?
I think we need to get on top of this shit pronto.
I agree 100% with you that it needs to be addressed and quickly. As easy as it is to simply let the machines take over and do their thing, you see the limitations on days like yesterday. One 30 to 40 minute span will probably sink an entire market making firm, where they absorbed all the losses from out of position trades. They also said that no customer accounts were affected. Either way, it seems to me that this puts the argument against HFT in the driver's seat going forward. This is why I highly doubt traders will ever be fully pushed out. Machines just can't deal with screw ups.
Frankly, it looks like Mario Draghi does just as good a job at whipsawing the markets as algo's do.
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From what I've read the algos
From what I've read the algos kinda forgot the "buy low sell high" rule and started doing the reverse, and now Knight is on the hook for the customer bids they put through above market price.
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all trades were cancelled,
all trades were cancelled, lucky night for knight
trazer985: all trades were
all trades were cancelled, lucky night for knight
No, they weren't all canceled. Only trades that were outside of a 30% band were cancelled, and that was only on about 6 securities. Other than that, they are on the hook for the balance of the trades. Looks like they are asking JPM for financing help because it crushed their capital base so much.
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Addinator: trazer985: all
all trades were cancelled, lucky night for knight
No, they weren't all canceled. Only trades that were outside of a 30% band were cancelled, and that was only on about 6 securities. Other than that, they are on the hook for the balance of the trades. Looks like they are asking JPM for financing help because it crushed their capital base so much.
They should ask JPM to take over their trading operations.
"Every man should lose a battle in his youth, so he does not lose a war when he is old"
They are speaking with JPM
They are speaking with JPM this morning concerning an addition to their capital base that has so
far been decimated.
Edmundo Braverman: Knight
Knight could have been hacked
Remember when Reagan wanted a direct electronic link between his nuclear button and the bomb? THIS is why it's a bad idea to take humans out of the equation. Regardless of whether or not this thing was hacked or not, the fact that this thing traded several orders of magnitude above average volume is a serious downside: aren't some type of circuit breakter provisions for trading halts programmed into the algos? If there's a space where some rules could be made on the basis of common fucking sense, this is it. WTF
YOU JUST GOT TROLLED
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The fact that the NYSE
The fact that the NYSE cancelled trades is more damaging to market integrity than Knight's Algos Gone Wild.
The fact that JWF could trade 100x it's average daily volume on strictly bid hitting and be down ONLY 10% is an indication that there is healthy competition out there to provide liquidity.
In other stocks with broken trades, how were people to know that it was just a glitch? Only in retrospect are trades "clearly erroneous." Foreign nations nationalize utilities, companies commit fraud, go bankrupt, etc. These types of events ALWAYS hit the stock price before the newswires. During those panic moments is when liquidity providers willing to take actual risk truly provide utility to the marketplace - and they should get paid for accepting that risk.
What if EJ, a Chinese real estate company that had broken trades yesterday, legitimately had problems? A guy in my office bought heavily into the dip and then sold his position. 6 hours later, he found out his buys were all broken, but his sells all stood. This left him short and turned his PnL from hugely positive to negative. It's a bunch of bullshit.
If an order is sent to market and filled, it should stand - no matter what.
No, this was almost certainly
No, this was almost certainly a programming mistake.
In all likelihood, none of the managers know what happened, they are combing through the code to see who committed what to CVS and how much testing was done.
They may never figure out exactly what happened or who broke it.
Needless to say, a bunch of Knight's developers probably have brown pants right now. Most bugs are unintentional, meaning nobody knows who is responsible, and in analytics and algo trading, bugs tend to be pretty high profile and tend to cost hundreds of millions of dollars rather than merely crash your Excel.
Charlie Gasparino has never spent a single day in his life programming or working in technology at a large corporate outfit. At every major bank, there are a few "earthquakes" every year where one part of the firm causes millions, even $10s of millions in damage. Almost always due to a bug.
This earthquake simply happens to be a 9.0 magnitude one that is apparently costing Knight hundreds of millions in damage. 2% chance it was hacking; 98% chance it was simply a bug.
Work hard, play hard.
Anyone have any thoughts as
Anyone have any thoughts as to where the shares go if JPM provides DIP? They are at $3.50 now.
Knight's CEO was on bloomberg
Knight's CEO was on bloomberg http://www.bloomberg.com/video/joyce-we-have-work-...
I had a large position in KRO that benefited from this mess yesterday. KRO had a massive short interest prior to this so I wonder if some of the bigger shorts used the confusion as a covering opportunity.
More likely they were
slotmouth: I had a large
YOU JUST GOT TROLLED
http://www.troll.me/images/red-foreman322/dont-you...
. Just noticed the Joyce
--
sm
Eddie, I had a different
Frieds, Yeah, it looks like
Any info on KCG bonuses this
"Every man should lose a battle in his youth, so he does not lose a war when he is old"
Stock price at $3.02 is a BUY
YOU JUST GOT TROLLED
http://www.troll.me/images/red-foreman322/dont-you...
The monetary loss isn't the
I must say - I'm quite
But Rhaegar fought valiantly, Rhaegar fought nobly, Rhaegar fought bravely.
And Rhaegar died.
Spoonfork, I think that is a
Some are suggesting this was
panchofabricio: Some are
panchofabricio: Some are
I think this is something
Anyone else think the stock
Head of Metal Website: www.headofmetal.com
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In The Flesh: Anyone else
txjustin: In The
YOU JUST GOT TROLLED
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So any of you guys long/short
Probably best to stay away.
Work hard, play hard.
Were I a day trader, I'd have
YOU JUST GOT TROLLED
http://www.troll.me/images/red-foreman322/dont-you...
Hope anyone who went long on
Buy again! BOOOOYA SKEE
YOU JUST GOT TROLLED
http://www.troll.me/images/red-foreman322/dont-you...