Knight Capital Says Trading Glitch Cost It $440 Million
$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.
Daydreamer
Philly
The purpose of stock markets is to generate capital for businesses. But in reality, they've become casinos where investors of all kinds speculate on what stocks will go up or down. Rarely is money invested into the market for the purposes of capitalization. It makes sense that a stocks price would go up if the company is paying a dividend, but again, rarely is this the case. Instead the whole market is driven by speculation and perception. Rational thought is nowhere to be found.
Toronto
Dear Pierre, the Free-Trader,
The healthy functioning of capital markets is based, ultimately, on the confidence of average investors that the market is basically fair and they will be rewarded in the long run for intelligent paitent investing.
A whole bunch of unregulated 'innovations' -- opaque derivatives that are falsely rated triple A, skyrocketing credit default swaps, 'defensive' hedges that turn out to be speculative gambles, super-fast computer trading that leads to market takeover by margin traders who crowd out patient value investors with substantial skin in the game -- all these clever, unregulated innovations are making billions for hedge funds and investment banks but are steadily undermining the confidence, and rewards, of average investors. People like me are getting out of equities, for good. Beware. It's happening, and all your bleeting about over-regulation is just hastening our exit..
In reply to TPierre Changstien
RealCalGal
West Marin
Tax trades. Lower the deficit. Reduce computer trading. Make the stock market about investment again, instead of the gambling den it has become.
Joe M.
Miami
"the company said that none of its customers had been hurt by the errant trades." Of course they said that.
The question is: Who's going to eat the $440 Million? The company? Insurance? The guys who wrote the faulty software? Somewhere in the virtual banking world, there's a $440 million smoking hole in the ground that someone has to fill up. Only more proof that our financial system is playing with monopoly money - That they bought with our real cash.
TG
Seattle
Stop the madness: Impose a transaction tax!
Anthony
Chicago
This glitch in the software, plus the growing threat of cyber-terrorism or cyber-robbery makes me think we'd be better off with people trading in the pits. As in medicine, and here as well, maybe, just maybe, our feats of technological brilliance surpass our ability to control our inventions. I'm no Luddite, but the idea that chunks of wealth the size of this loss or larger can disappear into thin air in seconds is disturbing.
Mark C
Upstate NY
"The question is: Who's going to eat the $440 Million? The company?"
The company will of course do it's patriotic duty and take full advantage of the tax laws to write off the loss and in the end it will get a nice fat rebate check courtesy of the American taxpayer.
Huge bonuses all around!!!
In reply to Joe M.
Captain Obvious
Baltimore MD
Take a look at returns on 401Ks, and the stock market in general, over the last decade. There's simply no profit left in any long-term investment strategy, for a retail investor. All the profits go to fees, or to churn, or to all the different strategies of computerized trading (in effect, front-running all your IRA's trades.)
Even a very slight transaction fee, like gravity or friction, would bring some semblance of order back to the trading world. But I hardly think it matters in terms of the long-term prospects of your retirement account.
Duncan Lennox
Canada
"Until this week, Knight had been one of the biggest beneficiaries of the evolution of the market, helping clients trade in and out of stocks at high speeds."
While producing NOTHING ; except a scam on the rest of us.
Let`s hope the people who take home the big bonuses from Knight et al ,take home the losses as well.
Joe Schmoe
Brooklyn
At a quant interview I once challenged my interviewer to explain exactly what function his sort of people (high frequency traders) performed for the market. His answer was: to provide market liquidity. The rationalization for their greed always boils down to that answer, and I don't find it persuasive anymore. Daydreamer is right. The market makers hardly seem to have capitalization in mind when doing their business. How many of these brazen "Bob's Capital Group" companies are out there? I see them as nothing more than efficient vehicles for vacuuming even more money into the wallets of the 1%.
In reply to Daydreamer
BinProv
New England
The entire capitalist system is a "glitch" and 99% of the world's population are the losers. The stock market itself is nothing more than a casino.
Squifford Bear
Santa Monica, CA
Thomas Joyce has shown that the market isn't an investment tool anymore for most people. It is legalized gambling for a few. Helping clients trade in and out of stocks at high speeds is not an investment. No wonder the American public is discouraged with Wall Street.
cgehner
Seattle
This and other issues surrounding computer trading makes a mockery of economists' claims that the stock market is the pen-ultimate example of "free market economics at work", where rational players, with "full information" make reasoned judgements to buy and sell. I recently heard that computer trades now make up as much as 40% of trades on the stock markets. This, then, is more like the Las Vegas casinos where retired bored older people pull the levers of the one-armed bandits, which are computerized to make pre-determined pay-outs, thus more "rational" than what the stock market is doing now.
joe
ny
A transaction tax would help but it wouldn't fix the problem of the inequity that has been progressively and deeply entrenched into the system over the past 20 years. High frequency trading programs encoded into high-speed computers are available only to wealthy investors. Alternative investment strategies are theoretically available to everyone but, in practice, are the exclusive domain of wealthy hedge fund investors. Naked shorts are not something your grandmother is going to engage in, nor should she, and if she doesn't, her retirement account is vulnerable to sharks in suits. Dark pool exchanges have replaced the NYSE as the place where the majority of trading takes place and the vast majority of people are not even aware of their existence.
People who argue that high frequency trading provides liquidity are trying to fool you into thinking that liquidity could not exist without these recent developments and the people who argue that these programs and alternative strategies using futures or options enhance price discovery or reduce volatility and are therefore beneficial to all are simply lying.
Capitalism in financial markets breaks down when restrictive controls are not applied. Since the explosion over the past 20 years of the OTC derivatives market and computerized trading, an unprecedented shift in the concentration of wealth, has occurred. The top 1% have taken all the money there was to make from equities and financial instruments. We must take away their toys.
Matthew
Tallahassee
Someone remind us again--what do the most privileged and wealthy among us actually contribute to our world? Increasingly, it looks like the answer is. . . our destruction.
Ira
Boston
Computer glitch? Not hardly. The computer, I'm sure, did exactly as instructed. Trading systems, weapons systems, defensive weapons systems - all of these contain artifacts of HUMAN error just waiting to be exposed.
Computers are tools. If a chain saw cut off your hand, would it be CHAIN SAW error?
The needed balance between trusting computers, verification, need for speed, imagining what could go wrong, testing and more will keep us challenged for many years.
Still, better Knight Capital than strategic missiles.
Qev
Albany, NY
Dear God, I hope they were big-time Romney contributors.
Chris
New Jersey
Not surprised that this happened and it will definitely happen again. The dirty little secret in financial IT services is that much of the systems architecture and programming work is performed by contractors. Yeah, there are IT managers and the like that supervisor the projects and staff but, truth be told, when systems become complex even sophisticated QA methods can "fully" expose ill-designed software. This financial IT underbelly is very volatile. It is not uncommon for IT contractors to come and go during the course of even a relatively short 2 year project cycle. Much of this volatility is due to work conditions: extreme personnel oversight, life in a sea of anonymous cubicles, pressing timelines, coder fatigue and the opportunity for landing a better, less stressful position somewhere else. There is little emotional or morale investment made by contractors. Write the code and go home to the family at day's end. Let QA discover the bugs and notify me. Those of you who are in IT services know what I say to be true. Expect this lack of investment in full-time employees to expose "glitches" in other industries. It's just a matter of time. This is the true underbelly of the U.S. marketplace, both commercial and governmental. Shut-up and don't complain, vote.
Thomas
Indianapolis
The purpose of high-speed computerized trading is to enable nearly instantaneous buying and selling with the intent of raking billions of dollars out of the economy, as instant profits, while producing nothing. In this sense, the market play was akin to that of a casino, and Knight, a high roller, lost big time while likely having no clear understanding of the ‘odds’ imbedded in their programming.
Village Idiot
sonoma
Yes, blame those sneaky, conniving, underhanded incompetent computers. What? Dr.Frankenstein and his Masters of the Universe lost control of their monster -- again?
No, this is just another example of monumental Wall Street management stupidity, in a long and tedious list of monumental stupidities and outright criminality. No amount of computer programming can fix that problem, but some legislation - including a provision for serious jail time - might.
The best that can be said of this latest debacle -- and it is schadenfreude-gratifying to say it -- is that losing $440 million couldn't happen to a nicer bunch of people. Not that any of them will lose their bonus, of course.
But there is the potential for good news: If the firm goes under because of this management screw up and all the employees are laid off, there will be 1418 people around the world free to go find some productive work to do, like cleaning the toilets at San Quentin. We should no more lament their fate than we would that of out-of-work Mafia hit men laid-off because the feds busted The Firm. After all, it's the glorious "creative destruction" that makes capitalism so great. Isn't that what Romney tells us?
Kirk Hartley
Chicago
The whole story highlights the reality of massive profits from simply programming computers to do things based on slight informational asymmetries, which has nothing to do with stock picking or other substantive knowledge. Trading on tiny asymmetries is not useful to society.
As taxpayers, we subsidize that useless business by paying for a vast regulatory structure that tries - but fails - to ride herd on this kind of trading. We also subsidize the business by paying the stock trading fees needed to support the entire endeavor at the NYSE, Nasdaq, etc. , and they send many dollars to support all the computer trading, etc. We further subsidize the industry by paying for all the public judges and agency lawyers needed to straighten out violations of law. We also pay for the federal bankruptcy judges to straighten out private messes created from entities that fail. And, worst of all, these issues take Congressional attention away from the real issues that need attention - e.. foreign policy, "entitlement" changes, etc.
It's time to end the subsidies and distractions by prohibiting this kind of trading through publicly regulated and operated exchanges. If the traders want to build their own unregulated private platform at their expense, let them so long as it is explicit that there are no actual or implied guarantees against financial failure. I'm tired of paying for armies of people to work on frauds and screw ups arising from socially useless activity.
John V. Kjellman
Henniker, N.H.
There is no sound, economic reason for trading 4 billion shares a day. I remember when the markets were working quite will trading 12 million shares a day. We're doing over 300 times that now, the whole global economy hasn't grown 300 times in the past 50 years.
In reply to Steve
Joe
undefined
Having spent billions on technology, and not to mention the hundreds of millions it has bestowed on its leaders over the years, the NYSE (and the NASDAQ for that matter) have become jokes of "self regulating" entities. It's easy for Knight and the NYSE to blame this on computers, but the simple truth is that humas caused this and the responsible individuals should be held accountable.
The "market" has lost all touch with reality, individual investors and the public trust. Buyers beware - the game is stacked against you!
TPierre Changstien
bk,nyc
You don't know what you're talking about. The people who design these programs are highly skilled and very well paid. That does not remove the element of human error from the system. Furthermore, this is more a failure of testing thank anything. I worked at one of the biggest banks in the world and we replaced our entire trading system with something built almost from scratch, and we did a month of parallel testing before we let that thing go live. So if there is a problem here, I think it 's more likely it was the human error of going live before enough testing was done.
In reply to Connect::the::Dots
Mark Hugh Miller
Los Angeles
This raises the question of what is the purpose of our markets: long-term prudent investment in business, or moment-to-moment trading by professionals who leverage off of investors' financial commitments for incremental profit? This trend risks the total loss of investor confidence, and the collapse of our financial system - long-term (a concept lost on the greed-mongers in the pits).
A CBS piece about High Speed Trade from october 10 2010:
www.cbsnews.com/video/watch/?id=6945451n
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