“There is no kill switch; the minute you hit the send button on an algo it’s running and you can’t stop it,” says Ken Polcari, managing director at ICAP Equities and a 30-year veteran of the NYSE trading floor. “Maybe we do need to reflect on where the line is between humans and computers.” (Source: Financial Times)
Knight Capital Group is now world famous for coming this close to plunging to a fiery death. And its near-death experience might be one of the best signposts of the financial singularity.
Knight is an electronic trading group and market maker. On the first day of August it experienced a software glitch that proved more disastrous than your standard 404 error. Here’s how the company described it the next day:
Knight experienced a technology issue at the open of trading at the NYSE yesterday, August 1st. This issue was related to Knight’s installation of trading software and resulted in Knight sending numerous erroneous orders in NYSE-listed securities into the market.
This cost the firm $440 million dollars — all in less than an hour. Barry Ritholtz helps put this in perspective:
The snafu with Knight Trading as they were testing new algo trading execution software was reputed to cost them $10 million per minute — about $167,667 per second.
Some will say that this is just a symptom of Knight’s particular brand of carelessness. A one-off, albeit a disquieting one. Yet as the Flash Crash of 2010 still looms in the rearview mirror, we must ask how many one-offs are needed before we call it a trend? Not many, says Jeff Carter:
If you follow people like Themis Trading, daily they can show you a flash crash in a particular stock or ETF. Daily. In futures markets, we see it happen every week in some market somewhere.
Let’s note again: experts say about 70% of equity trading on the NYSE now consists of high-frequency trading. No algorithm is fool-proof, even less so if it fails to consider the impact of other algorithms and the collective effects on the market, which may be amplified in some Soroesque reflexive cycle of doom. With all of the best intentions of the world, would it really be possible for an SEC or CFTC to get a grip on this?
“By the time the ordinary investor sees a quote, it’s like looking at a star that burned out 50,000 years ago,” is how Sal Arnuk, of Themis Trading, put it to Wired Magazine. Cheery thought.