Knight Capital loses $440 million in 45 minutes due to computerized trading

Well, this is big news:

Will the big Wall Street traders finally decide they need the SEC to ban or radically slow computerized trading? Should we we have a transaction tax on trading rein in the worst excesses?

Seems to me losses like this are equivalent to the famous “Black Swan” reverse-lottery trading. Bet huge amounts of money on statistically sure things, and reap small rewards. Except when something unforseen happens, like a tiny software error, and then you’ve lost huge amounts. But traders are addicted to this thinking because, hey, that unusual thing doesn’t usually happen, and so you rack up your profits day after day and month after month and quarter after quarter. Then smash. In other words, professional Wall Street traders are, like most people, incredibly bad at risk management.

Part of the problem appears to have been that no one was paying attention to the thing; apparently many traders noticed something was wrong pretty early on, but it was left to run on and on.

I accidentally the whole pension plan.

Given the state of some phone systems and the damned voice operated systems, who is to say they didn’t call them up and couldn’t get through the system to a real person?

(and yeah, I’m mostly joking)


Wall Street lost billions in the past few years and they had the audacity to fight against changes and regulation. These people live in the Wild West, where there are no rules. $440 million of other people’s money is nothing to them, I’m sure the CEO will still walk off with a healthy golden parachute.

Except this wasn’t $440 million they were managing for other people, this was half a billion of Knight Capital’s own money.

do do do do do DO do do do The girl from Ipanema goes walking…

Why is this the CEO’s fault?

Am I missing something when this looks like a question as to whether they will be asking to be saved form themselves? Why not just ban it themselves?

What problem did this trade create for me or you?

Ultimately he made the decisions that put this in place.

If he’s going to claim the megabucks for how well the company does, then he needs to take responsibility for the failures as well.

At sea the captain goes down with his ship.
On Wall Street the captain rifles the purser’s safe, grabs all the alcohol, and jumps into his own private lifeboat saying “so long, suckers!”

Perhaps they saved money on programming staff, and couldn’t afford to code all the safeguards they really needed. The bottom line is the bottom line, after all.

The problem is that we don’t know any answer to this question. We have seen that the market can drop 10% within 10 minutes and a trader can lose 440 million in 45 minutes. What else is out there? Are we sitting on some potential time bomb where some HFT causes things to crash artificially and then based on margin calls or some other linkage we have a real crash? No one knows for certain.

Some effect we don’t know about might trigger some other linkage we can’t really describe? Maybe there’s some* even worse* thing, worse than the first thing you mentioned that we don’t know about. You’re right, we just can’t be certain. That’s good enough for me, let’s dismantle Wall Street.

Tear Down The Wall!!!

No one is talking about dismantling Wall Street.

The problem is rapid automated trading. Things happen so fast that, if something does go wrong, there’s a very real possibility of things getting disastrously out of hand before anyone even realizes what’s happening.

There’s no time for humans to do sanity checks on what’s going on.

I’m not saying he won’t fall for it. I just don’t feel angry that he’ll get a nice check with his departure. The company can’t function without computerized trading and I don’t see how it was his actual fault.

How about instead of dismantling Wall Street we limit computerized trading to trade once every minute instead of second by second?

On the other hand, to go back to the tempo of trade we had before computerized trading will destroy Capitalism and send us back to the socialism of the Reagan era.

That still doesn’t answer the question: Why? Or, as John posed it, what problem did this trade create for me or you?

John, it interfered with the open and transparent trading of the market. You might complain about this but stock markets are a zero sum game. One person makes money on a stock, someone else loses. Just think if you bought some stock when all this was going on, and you bought a stock that had just risen 10% at the peak, and then it dropped back 20% to the “market price.”

It’s really not any different than the practice of front running. Which is to place a buy or sell order just ahead of a big order that you know is coming. You make a quick gain and no one is hurt. Except it hurts the efficiency of the market and games the system and people get hurt (or make windfalls) that shouldn’t happen.

And in a bad case, it could cause bankruptcy or taxpayer intervention…

The volume of these transactions is so great that it can take much longer than 45 minutes to determine there is a problem. Accurate information can take 12 hours or more. There are millions of transactions each day, 24 hours a day, around the world. The cumulative balance of these transactions is only guestimated in real time.