Art Cashin On Wall Street's Eras Of Error

Tyler Durden's picture

In the aftermath of Knight's crushing algo-driven error and subsequent cash loss, which may well prove terminal for the business - an artifact of a broken market we have been warning and writing about since 2009 - we present some informative insights into the various eras of Wall Street trading errors courtesy of that grizzled trading veteran, the Chairman of the Fermentation Committee, Art Cashin.

From UBS:

The End Of An Error – The conversation on both the floor and the financial media was dominated Wednesday morning by a series of apparently erroneous trades.

Between the 9:30 opening and about 10:15, a series of larger than normal orders spewed onto the floor. A later post mortem would reveal that there were approximately 150 different companies involved.

The orders were so large that in some cases they represented the average volume for 10 or even 20 days. Some may have been subdivided into a series of smaller lots.

Things almost got ugly as the sharp price movements in the stocks produced sharp movements in the options for those stocks. That set up a possible feedback loop with stocks influencing options which in turn influenced the stocks again.

That could have turned into a flash crash style chain reaction.

Luckily, the system worked, as humans intervened and several circuit breakers kicked in. Some stocks were temporarily halted and the negative chain reaction was interrupted briefly but effectively. A notable victory for the humans.

Knight Trading, through whose system most of the orders appeared to have been transmitted, was said to turn away further orders, presumably to limit client risk. The market seemed to interpret that as the problem was unresolved, and leaned on the stock.

In five decades, we have seen all manner of errors. Some are simple misunderstandings. "Buy 5 million dollars worth of IBM" becomes "Buy 5 million shares of IBM."

Some are the results of short cuts. Several decades back, when program trading was in its infancy, some traders at Kidder Peabody tried to reduce the number of key strokes. Since we only traded in round lots of 100 shares or more, the last two
zeroes were redundant. So, they taught the computer that when you hit a 1, the computer should automatically add two zeros to make it 100.

That worked fine until one lazy summer day, a trader told an intern to sell 1700 shares of Boeing (BA) The unknowing kid naturally typed in 1700 and the computer added 00 making the 1700 into 170,000 shares.

It might have been caught but the computer had been taught another shortcut. To keep their orders from being caught up in a "large order net" and handed to a human, they taught the computer to slice and dice large orders into multiple orders of 500 shares.

So, on a lazy summer afternoon, the auto-routing mechanism at the Boeing post began to shoot orders out like a machine gun. Luckily, the day was slow enough that a human caught it before more than 50,000 had been executed.

Errors on Wall Street have a long history, unfortunately.

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centerline's picture

Theft on Wall Street has a long history as well.

5880's picture

1991 we were doing s&p arb. a merrill clerk was supposed to (I think) sell $25m dollars moc, she did shares.

Manthong's picture

"the day was slow enough that a human caught it "

It's a good thing that we have so many people on the trading floor to keep the market real.

LawsofPhysics's picture

Until there are real consequences for bad behavior, at all levels, nothing changes.  Please put these old fossils out of their misery already.

larz's picture

No prob douche the goldman quant thieves and politicians already have FY

AbelCatalyst's picture

Um, who cares? Apples and oranges...

buzzsaw99's picture

cashin is full of beans

Stoploss's picture

It's always the negative chain that's interuppted.

That is why this will never end until the negative chain is allowed to run it's due course. Wiping out all the bullshit with it.

Unfortunately, the entire financial system is a complete and total lie, therefore, the negative chain will always be interrupted.

The "market" will remain dead for as long as true capitalism is under arrest.

MrBoompi's picture

Exactly.  We ignore the daily "positive chain" that skims $400m out of the pockets of others, because that's market making. 



adr's picture

Yes but now errors happen millions of times a day within one second. Humans can't intervene anymore. Look at the damage that was only caught after 45 minutes of trading.

The market has already been permanently damaged. yesterday morning has only proved that the market needs to be taken down. It doesn't trade on anything that can be considered rational.

Computers are programmed to hit predetermined price targets. If you type $110 on August 15th for a $90 stock. The computer will instantly analyze how many miniscule trades it will take to hit that target by that date. Nomatter what happens in the macro environment the computer program will still try to hit its target.

That is the way the PPT works. When the buy button is triggered the computers automatically buy baskets of stocks and commodities to hit predetermined price targets. 100 point rallies and 2% commodity gains within minutes.

Humans can't intervene because they can't execute enough trades to have any effect on the massive volume coming from the machines. You're trying to take down a goliath tank with a butter knife.

Bay of Pigs's picture

Art says the glass is half full

repete's picture

he is certain of this because he drank the other half!

Conman's picture

It was jsut a confirmation of market manipualtion.

Just like todays market action. Really how are we almost UNCH?

Anyone still "invested" in this market deserves to lose it all.

MrBoompi's picture

I have a 401k.  My options are:

1) keep it invested in shitty mutual funds

2) keep it invested in shitty bond funds

3) put it into cash and make 0% (while you still pay the fees of course)

4) Withdraw it all and pay about 50% taxes and penalties.

You're fucked coming and going in this casino.



earleflorida's picture

all the cash is buying real estate fist-over-fist,... that's where the smart monies going - CASH!!!


Renewable Life's picture

In this fraud of a market we live in, I voted to get my money out of the system and take the 50% hit, put the 50% you still have in cash in your safe (no fees) and wait for this sucker to implode! When it does, and it will, watch gold drop 300-500 an oz as all these idiots panic and scramble for liquidity!!!!

At that moment be ready to by physical gold and silver, in cash, at fire sale prices!! Then sit back and watch your money go up 4-5x over the coming months, as the idiots print and print and print the dollar and euro into oblivion!!!

Stop pretending you have more then 50% of that money in your account anyway, it's either going to get cut in half with stocks, cut in half when interest rates rise, or cut in half with taxes and fees!!! Get control of your money, physical control of it, you'll sleep better at night, trust me!!!!

blunderdog's picture

5) Take a loan out against it and buy precious metals, pay the minimum on the loan until the rest of the 401K balance is gone, then declare bankruptcy.

Mr Lennon Hendrix's picture

In an interview on KWN last week Cashin said, "....the amount of liquidity that’s around the globe should be hyperinflationary.”

Think about the word should for a minute.  The word "should" implies either present or future certainty.  If he had said the word "could", then there would be a level of uncertainty, but he said should, as an absolute.

Cognitive Dissonance's picture

Some entity or entities is sitting on the deeply submerged beach ball. Nature will eventually take its own course and the pressure will be released.

Not if........just when.

Cognitive Dissonance's picture

It can all be fixed bro. Just give me a little more least until 2012 bonuses are paid.

Savvy's picture

The unknowing kid naturally typed in 1700 and the computer added 00 making the 1700 into 170,000 (Boeing) shares.


That wouldn't have happened in late Aug 2001 would it? These 'errors' always seem to work in favor of the instigators.

surf0766's picture

GM earning fall 41%, better than expected.


The propaganda machine is on full throttle

ebworthen's picture

Hey, seen those Chevy Volt commercials?

"I forget the last time I bought gas."

Yeah, and how's that electricity bill from the coal fired plant?

Have you calculated the cost of replacing those batteries?


Dr. Kenneth Noisewater's picture

My electricity bill has barely budged, thank you, and all of the 'fuel' for mine was created from entirely domestic sources.  Last time I checked, there weren't any disgruntled coal miners or nuclear technicians flying airplanes into buildings.  When charging at home, my 'fuel' costs about 4 cents per mile, and when charging at the office it's more like 0.6 cents per mile.  How are your fuel costs?


The Volt battery parts on GM wholesaler websites run about $3k, presumably net of a core charge for the old battery.  That's roughly the price of the trans on my old Benz, and with a warranted life of 8y/100k mi, it's comparable to the warranty for a Hyundai and far better than that of say VW, BMW or Merc..

Oldballplayer's picture

Good for you.  Really...if it works for you.

I drive about 5,000 miles a month.  My driving would kill that battery in about three years.

THAT is the threshold we need to get to.  But baby steps I guess.

AND....don't do it on my nickel.

Payable on Death's picture

You freaking loser. That piece of crap is subsidized and politicized to kingdom come. Give me my money back.

Dr. Kenneth Noisewater's picture

bwahahahaha suck it!


You can have your semicent when I get all the money back I paid to subsidize other people's houses, state taxes and kids!

malek's picture

About 15 cents per mile. As I drove 6000 mls last year, that were ~$900 fuel costs.

How many miles do you drive a day, or per month with that car?
Do you own a second, gasoline-powered car for driving longer distances?

Dr. Kenneth Noisewater's picture

So far, ~11000mi/yr, and when I go on long trips I just use gas, though it throws off my lifetime electric mileage (which is just north of 90% currently).

DCFusor's picture

Mine is charged from solar panels that also run my 4 buildings on campus.  Battery has 8 yr warranty, and current out of warranty replacement price is $3k.

Coal power is under 1/3 of total power generation these days.  It's exceeded by both natgas and nuclear/renewable separately.

I love my Volt.  Take your FUD and cram it where the sun don't shine.  Or just wait for gasoline to rise further and enjoy paying for the military to try to get the price back down in a losing game that makes the rest of the world hate us.  Yeah, that's the ticket to where you are going - hell.


ebworthen's picture

You didn't thank me and every other taxpayer for subsidizing your Volt, your electricity, your University, "your"  buildings, and your salary.

Dr. Kenneth Noisewater's picture

When I am thanked for your mortgage, state tax, and kid subsidies first, then I'll return the favor.

* mortgage interest deduction subsidizes loans, which make houses artificially more expensive and encourages bank profits at the expense of thrifty folks who would buy a correctly-priced house in cash.

* state tax deduction subsidizes people living in hightaxland and their corrupt, spendthrift mollycoddling governments (NY,NJ,CA,etc) at the expense of those of us living in lowtaxland whose governments are more frugal.

* child tax credits subsidize fucking, and since I'm not doing any fucking, I shouldn't have to pay for yours.  Same goes for school taxes too: if I could move someplace where there were no public schools and families had to pony up for private instruction or homeschool and I got to keep the difference, I'd LOVE that.


Oh, and the inflated returns on social security contributions are bullshit, howsabout SS bennies match interest on the 10-year?  There's another subsidy for old people.  Oh, and EMTALA too.  When all that shit goes away, you can have my subsidy back.  Otherwise, I shall leech to the best of my ability while the leeching's good!

Renewable Life's picture

My wife got the Nisson Leaf, she loves it!!!! She commutes about 85 miles a day. Electric bill hasn't moved up a penny, actually, we are more conscious of it, so we have been turning things off more and the bill might have gone down a smidge!!!

Battery has 8 year warranty, no oil changes, no gas, no issues at all so far! Unless you call saving 350 a month in fuel an issue!!

I also make my own biodiesel for my diesel Mercedes and truck, I've driven 85,000 miles in the last 4 years on those two vehicles, not one problem, just oil changes and fuel filters!!! So besides buying regular gas for my BMW that I drive a couple times a month, I don't pay a penny for fuel, saved over $25,000 in the last 4 years, and now my wife's adding to the savings!!

Forget politics and start freeing your mind with actual facts and information you can verify by doing your own research and experiments, if you want to stay a slave, stay a slave, but don't scream from the front porch of your plantation, how great you have it, to all the free men walking by!!

Payable on Death's picture

How are you or I free if you are living off my subsidy? The cheerleading from the non-economic car advocates is funny--second guy in this thread to claim electrcity for electric cars is free.

And this from yesterday's Weeky Standard newsletter:

"The Leaf was originally sold as the first electric car with a 100-mile range. It didn't work out that way. Once the car was in the wild Nissan admitted that range could vary by 40 percent—40 percent—depending on conditions, and the EPA rated its range as being 73 miles.

But that's only when the car is brand new. Leaf owners in Texas and California are now reporting "capacity losses" of up to 50 percent of their range. As Lando would say, this deal keeps getting worse all the time."

malek's picture

So you own 4 cars - is that for two people?

Sounds like a really good saving strategy to me!

Dr. Engali's picture

Yet the market is green in all this mess. Unbelievable.

adr's picture

It looks like the 15 minute interval algo is back in charge. On the Nasdaq chart: high at 10 AM, next high 10:15, next high 10:30, and a drop. Every 15 minutes is marking a large turning point.

It looks like the Dow has been on a ten minute cycle based on the 9:33 intervention. Spike up at :33, :43, :53, and almost every 10 minutes on the dot since 9:33.

Clowns on Acid's picture

2012 A Space Odyessy - Hal is taking over.

Get on it Billy Banzai !

ebworthen's picture

On CNBC Simon Hobbs the casino pumper was waxing (waning) philosophic about the efficiency of the markets and computer trading, intimating that humans were fallible and less "efficient".

Cashin responded:  "Simon, you get in a plane with autopilot that has a human pilot, would you get in a plane that only had autopilot?"

Hobbs face was that of a boy whose favorite toy was just broken.

jjsilver's picture

He talks as if he has intimate inside knowledge as to what happened, which I doubt. Nothing to see here folks just a fat finger move along.

larz's picture

think Knight's algos are special? what about the rest of the robo firms? whats the next boondoggle?

Nobody For President's picture

I personally am praying for a JPM trading desk to go bat shit so they get a two-fer. Would be nice to see Jamiey and his presidential cuffs talking to his hired hands on the Senate Banking and Finance Committee again.

dvfco's picture

I had the pleasure of listening to Art speak last year at a dinner at Chelsea Piers. He was being honored as a distinguished grad of a certain NYC Catholic High School. Of the 10 honorees, or so, he was the best speaker by a long shot and appeared to be an amazing guy.  He didn't come from much, knew he had been fortunate in his career, it appears he gives quite a bit back to those who helped get him there, and had a few genuinely funny quips. (I wouldn't have wanted to be the guy who had to speak after Art Cashin). Either way, whenever I see him on TV I always find his insight straightforward and he seems to only buy into 1/4 of the BS that most floor guys consider to be Gospel. He seems to have a strong ability to take a step back and think about things.

Otherwise, I look at a floor filled with people who were generally in the bottom 1/3rd of their HS classes, made it to college by playing lacrosse, getting on to the street by being hired by someone who played lacrosse in HS and/or college as well, etc.  Estimating their collective IQs, and knowing the needle would have pointed to the left of the top of the bell curve, it's no wonder that the Quants had their way with the market for so long.

Like anything else, the market has become saturated with these black boxes and HST, removing the excess profit. As each 'human' trader and/or investor disappears from the market, the black boxes can only beat other black boxes, as the loss of the 'sucker' from the market has and will continue to causes lots of problems.  Now, necessarily, the suckers will be the quants and HS Traders whose without the most beautiful box - so to speak.

The only thing left to happen if for a day like the Knight crash to trigger a huge explosion of negative activity by these boxes as one algo after another starts to 'panic' in an un-emotional way. It's actually too bad that there aren't a lot more Art Cashins on the floor. Remember the stability (and seemingly true capitalistic mentality) that we had when B.S. Dick Grasso ran the exchange? Did this stuff happen then? I don't remember. My guess is that LTCM and the Russian Debt Crisis were his biggest problems.

Art is no spring chicken, but when you see him walking away and retiring, I think we'll all see volatility pick up, and an additional drop in common sense.

dvfco's picture

One more thing - a question from our the loftier thinkers/readers:

I’m a huge stats/accounting and computing geek.  But, I truly have no idea what the answer to this question is:  If a six sigma event should take place (say) once every million years, does it make a difference if the trading changes from an open call market without HST, to black boxes splitting trading time literally down to the nano-second?  My question is – if the average time for a trade to be considered, placed and executed drops from 30 seconds to 10 nanoseconds (or about one-tenth of a billionth of a second), does that mean that the time between these six-sigma events would be the original one million years divided by 300 billion?  Should that compute to 1,000,000 years divided by 300,000,000,000, (the increase in market velocity) or 1/300,000th of a year, or as long as the original formula would suggest?

That would be 0.0012166666666667 of a year?  That (bad math alone) would equate to these six sigma events taking place once every 821 years.  What then happens if we have these back boxes making these six sigma bets 821X more frequently than in the days before the HST? Could it mean that a black swan event is a likely as not to happen each year?

My math is intentionally very rough, but I am wondering whether the concept makes sense or if I should be categorized on the left side of the IQ curve ?

Nobody For President's picture

Does the six sigma event have to do with time, or with number of trades? Or both? Or neither?

Is a six sigma event and a black swan event the same thing?

If it has to do with time, then the trade frequency is irrelevant. If it has to do with number of trades, then HFT will of course increase the frequency. If it has to do with neither, and is a black swan random event, then you are asking the wrong questions.

I'm probably wrong about this.

larz's picture

Thanks for pointing that out would never guess you were a stats geek. Moral aptitude was far more prvelent on the floor than anywhere in academia, any cubicle or corner office anywhere.  Art Cashun is one of us.  The cesspool I work in now cant hold a candle to the days of the floor in many very important ways.  An idiot with a degree or a high iq is still an idiot, look around you

blunderdog's picture

It doesn't make sense to use "six sigma" as a predictive tool.

Six sigma means that within a given dataset (of sufficient size, obviously) there will occur some TINY number of extremely rare occurrences--more than six standard deviations off the mean.  You can't make a prediction based on that thinking, because standard deviation itself is calculated using every member of the set.

mikesswimn's picture

I think you're conflating a few things (feel free to correct me if I'm reading your question wrong).  If a six-sigma "event" took place once every million years, then the unit you're using about is "per year".  As an example, a six-sigma year may be a year where the average temperature is 100 degrees (or something), or, for you sports fans out there, when the Cubs win the world series (yuk yuk).  Since "average annual temperature" and "the world series" are annual events, if thier probability of occurance is six-standard deviations from the mean (for the standard normal distribution), then they will occur once every million years or so.  The minute you start talking about six-sigma "trades" then you're talking about one trade per million trades, which, as you can probably guess, happens several times a minute.

All that being said, a single trade is unlikely to do much damage, but a million of them in a row probably will.  So, then you have to start calculating new probabilities based on the likelihood that you're going to get a million six-sigma trades consecutively or within a certain period of time.  Now the math changes a bit, and I'll leave it at that because I'm not smart enough to explain how this works.  If I had to hazard a guess, I would assume it would end up looking like a Gaussian process (a type of stochastic process) if you're interested in looking into it further (note: it's completely possible that I'm off base here).

TL;DR - No, your concept doesn't make sense and is all sorts of wrong, but on the bright side, you're probably still to the right of the IQ curve.

dvfco's picture

Thanks for the feedback.  There's nothing like asking other people for help while completely mis-stating a question to the extent that it cannot be answered.  I am using the tern 'six-sigma' as I was under the impression that traders used the term 'sigma' to mean 'standard deviation from the mean.'  (I used to think it was thought of as some kind of top-quality business practice concept taught by a roving gang of speakers invading large corporations telling them how to be more sucessful.)

Either way - my question should have asked if somehting has a chance of happeneing that is 5 to 6 standard deviations from the mean, statistically speaking, does the fact that trades now take place one billion times more quickly, and hundreds of times more frequently than, say, twenty years ago?

By trying to be moe specific, I think I obfuscated the whole questions.  Yes, I was using the terms "Black Swan Event" to be the same as a "Six-Sigma Event" which I was under the impression was synonymous with something having the chances of taking place that are "six standard deviations from the mean"

Thanks for your responses!