• Steve H. Hanke
    05/04/2016 - 08:00
    Authored by Steve H. Hanke of The Johns Hopkins University. Follow him on Twitter @Steve_Hanke. A few weeks ago, the Monetary Authority of Singapore (MAS) sprang a surprise. It announced that a...

Knight CEO Comments On Algo Failure Which Has Cost Him 70% Of His Market Cap In One Day

Tyler Durden's picture




 

Here are the choice highlights from the interview with Knight CEO Tom Joyce, who is
inexplicably on Bloomberg TV without any clear point, purpose or spin,
and nothing to tell anyone and restore confidence.

  • TECHNOLOGY BREAKS. WHAT HAPPENS NEXT IS HOW YOU ESCALATE IT. WE'RE PROUD OF THE FACT THAT WE ESCALATED TO IT DIRECTLY TO OUR CLIENTS AND GOT THEM OUT OF HARM'S WAY. THERE ARE TWO THINGS WE TAKE GREAT PRIDE IN WHICH IS OUR CLIENTS' FOCUS AND OUR CULTURE WHICH IS INVOLVED WITH COMPLIANCE. WE HAVE A CULTURE OF COMPLIANCE AND CLIENT FOCUS AND WE ASSERTED BOTH OF THOSE THINGS YESTERDAY.
  • IF YOU GET INVOLVED IN THE DAY TO TAKE MINUTIA, THIS WILL GIVE YOU A HEADACHE OCCASIONALLY
  • IT DOES AFFECT THOSE WHO MIGHT LOOK TO BUY KNIGHT CAPITAL STOCK. WOULD YOU BE INTERESTED IN BUYING SHARES OF A COMPANY THAT WITHIN -- WITHIN A DAY OR TWO COULD GET WIPED OUT?
  • OF COURSE NOT, THIS IS AN ANOMALY. YOU CANNOT KEEP PEOPLE FROM DOING STUPID THINGS WHETHER IT IS WRITING IN PERFECT CODA BUYING THE WRONG SOFTWARE AT THE WRONG TIME. THAT IS WHAT HAPPENS WHEN YOU HAVE A CULTURE OF RISK.
  • YOU STAY AWAY FROM THE DAY- TO-DAY MINUTIA AND LOOK FOR THE LONG TERM, AS AN EQUITY INVESTOR, IT WILL WORK OUT.
  • WE'RE OPEN FOR BUSINESS. WE GOT RID OF THE BAD TRADES AND FREE UP A LOT OF CAPITAL. WE HAVE EXCESS CAPITAL RIGHT NOW.
  • JOYCE SAYS 'WE ARE OPEN FOR BUSINES,' 'WE'RE REASONABLY BUSY'

And the kicker:

  • WE NEED TO DO A BETTER JOB ON OUR TESTING ENVIRONMENT.

Translation: we are shopping ourselves right now and unless someone pick us up by end of trading when the margin calls come in, tomorrow's open may be a little problematic. Of course, JPM will mysteriously step up in the last minute and provide a DIP-like loan in the process onboarding all the "segregated" accounts.

  • KNIGHT BONDS FALL 13.125 CENTS TO 70 CENTS ON DOLLAR

Quite soon we may find out what it means to trade in a market which has just lost one of its key market makers, responsible for up to 15% of overall liquidity.

0
Your rating: None
 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Thu, 08/02/2012 - 10:19 | 2672093 GMan_
GMan_'s picture

REvenge is a dish best served cold NITE.

Thu, 08/02/2012 - 10:29 | 2672136 dow2000
dow2000's picture

That's it, I fucking quit this market, I'm out!

Thu, 08/02/2012 - 10:46 | 2672177 BaBaBouy
BaBaBouy's picture

Casino NYSE... eTITANIC In Waiting ???

How Long before This Split-Nanosecond-Algo iPOD eTRADING collapses Whats Left of the Markets ?

 

Thu, 08/02/2012 - 10:58 | 2672247 Bananamerican
Bananamerican's picture

"WE'RE PROUD OF THE FACT THAT WE ESCALATED TO IT DIRECTLY TO OUR CLIENTS..."

Joycean slip? What does that even fucking mean??

Will "Re-Joycing" come along to replace "Corzined" on ZH?

Gotta love that "CULTURE OF RISK."....motherfuckers...

Thu, 08/02/2012 - 11:06 | 2672292 glenlloyd
glenlloyd's picture

Everything he said was garbage....it's just words that mean nothing.

Thu, 08/02/2012 - 11:23 | 2672377 overbet
overbet's picture

Selling KCG 2.5 puts expire in 2 weeks with 350% vol free $

Thu, 08/02/2012 - 14:02 | 2673158 OpenThePodBayDoorHAL
OpenThePodBayDoorHAL's picture

wow, are they brass and the size of grapefruits? That's some stones you got there pardner...

Thu, 08/02/2012 - 11:06 | 2672290 monkeyboy
monkeyboy's picture

CEO Knight will still be good to collect his payout & bonus, right?

Thu, 08/02/2012 - 11:32 | 2672411 Carl Spackler
Carl Spackler's picture

On the CEO comp...I HOPE not, AND we desperately need a regulatory CHANGE on HFT policy.

Good NITE, Irene !

Thu, 08/02/2012 - 12:09 | 2672499 The Big Ching-aso
The Big Ching-aso's picture

 

 

The next fiscal year-end Knight Board meeting......................

"So it's near unanimous.  The Board hereby approves Tom's full bonus for 2012.    Frank?"

"Let the record show I withheld consent because of 70% market loss due to incompetence."

"Everyone else disagrees with you, Frank.  Tom did an outstanding job.  It could've been 90%."

"Point well taken."

 

Thu, 08/02/2012 - 10:29 | 2672138 Pladizow
Pladizow's picture

Hal meet Joshua!

Thu, 08/02/2012 - 15:55 | 2673683 Simulacra10
Simulacra10's picture

Awesome way to work in War Games :)

Thu, 08/02/2012 - 10:31 | 2672140 Muppet of the U...
Muppet of the Universe's picture

Knight Capital recently purchased the futures accounts from Penson International, after Penson Clearing joined forces with Peak6 to create Apex Clearing.  Penson, an 11 cent stock lol, is now a subsidiary of Apex.

But here's where it gets interesting.  Penson's clearing of futures accounts covers well over 10 online brokers.

Now that Knight Capital is the clearing agent for these futures accounts, what happens to all of the futures accounts for these 10+ online brokerages, including popular ones such as ToS...

If Knight goes bankrupt, after their recent debocle with the FB IPO bungling and countless lawsuits aimed at them, including a 350 million dollar one by UBS, and now the 400+ million losses from yesterday, does rehypothecation play a role?

What happens to these futures accounts?  will they be rehypo'd to JM Morgan? 

What will happen to the futures market if a forced liquidation occurs?

 

Thu, 08/02/2012 - 10:32 | 2672151 fonzannoon
fonzannoon's picture

It will go up?

Thu, 08/02/2012 - 11:23 | 2672379 Nadaclue
Nadaclue's picture

Yes, the balloon has definitely gone up. These financial markets will continue to be a slow motion train wreck, until it's not and goes virtually all at once.

 

Thu, 08/02/2012 - 10:34 | 2672167 bdc63
bdc63's picture

so this is what a black swan looks like ... hmmm .. I had something entirely different pictured ....

Thu, 08/02/2012 - 10:44 | 2672213 Muppet of the U...
Muppet of the Universe's picture

I'm seriously really fuckin scared right now.  I'm short the Big Dow with practically everything XD

Thu, 08/02/2012 - 12:01 | 2672532 fiftybagger
fiftybagger's picture

Betting the house's chips to get more of the house's chips? What will you do when the house goes bust?

Silver For The People

http://www.brotherjohnf.com/

http://www.brotherjohnf.com/forum/

http://www.youtube.com/user/BrotherJohnF

 

Thu, 08/02/2012 - 12:23 | 2672625 The Big Ching-aso
The Big Ching-aso's picture

 

 

I hope it wasn't like a Fuxtnet virus.

Thu, 08/02/2012 - 15:49 | 2673662 Matt
Matt's picture

Is this a black swan? I mean, really, after the 2010 Flash Crash, wasn't this more like an inevitability than an unexpected or improbable event? 

Thu, 08/02/2012 - 11:12 | 2672326 disabledvet
disabledvet's picture

More like a dragon.

Thu, 08/02/2012 - 12:33 | 2672666 CrazyCooter
CrazyCooter's picture

A wise mind once said "never assume malice where incompetence will suffice" ... however, I think the malice angle could have a lot of merit in this case.

Were they hacked and someone got ahold of their code, tweaked it, and blew them up? Maybe. Was it on purpose, to scuttle the ship so to speak? Maybe. Was it genuninely a mistake, made it past all the gate keepers, testers, and overseers IN THEIR PRODUCTION ENVIRONMENT when EVERY TRADER OUT THERE watching these symbols saw this freak out go minute after minute and did nothing because they didn't know? Mabye.

Seriously?

How a firm could lose 70% of its market cap (this isn't the total volume of trades, just the losses) NOT NOTICE this volume of activity!?!? So, that means, any of their traders, at any time, could have just bought the whole fucking Dow and went to lunch while their orders filled? Serously?

There is a lot more to this story, as we will find out in the coming months...

Regards,

Cooter

Thu, 08/02/2012 - 14:34 | 2673314 Overflow-admin
Overflow-admin's picture

I just can't add anything morea accurate at the time.

Maybe a resumé? CRIMESCENE.

Thu, 08/02/2012 - 10:44 | 2672198 malikai
malikai's picture

You can count on it.

IIRC Apex also picked up that dogshit racetrack bond and it's losses in that deal. So add another what, $30 mil? Just to set the stage.

Edit: All it took to send PNSN to purgatory was that $30mil and a few other losses elsewhere.

Thu, 08/02/2012 - 10:46 | 2672217 Muppet of the U...
Muppet of the Universe's picture

holy shit, are you sure they didn't have any other major losses? For instance maybe bad debt after 2008 crash?

Thu, 08/02/2012 - 10:53 | 2672241 malikai
malikai's picture

PNSN didn't have much exposure to CDOs and the rest of that, instead they failed in risk management as well as general management/board stupidity. Bog standard stuff really. What really got them was the losses in Canada on some other shady deal I can't remember and then finally the Racetrack bond. It was tiny compared to their "funding", which of course included client money, but that doesn't matter.

Thu, 08/02/2012 - 10:43 | 2672208 SilverRhino
SilverRhino's picture

At this point in the game if you are stupid enough to still be trading and you see shit like this?  GTFO and perform the only true segregation of your funds from the companies in question.   CASH OUT & Bank of Sealy.

 

Thu, 08/02/2012 - 11:02 | 2672272 FeralSerf
FeralSerf's picture

Did you just buy a new mattress?  There was an unmarked white van in front of your house removing the old one.

Thu, 08/02/2012 - 22:38 | 2674736 Buck Johnson
Buck Johnson's picture

They have been using those customer accounts.  Do any of you remember them talking about that it's not illegal for the funds to use segregated accounts, just unethical.  As I said before why would Knight by Penson for 5 million?  It wanted and/or needed the 411 million in segregated accounts it had.  We are in a slow trainwreck.

Thu, 08/02/2012 - 10:32 | 2672150 bdc63
bdc63's picture

It's just a flesh wound

Thu, 08/02/2012 - 12:04 | 2672554 LeonardoFibonacci
LeonardoFibonacci's picture

Couldn't have happen to a much better deserving bunch of thieves.  With audited statements from the accounting firm of Dewey, Screwem & Howe.

Thu, 08/02/2012 - 10:20 | 2672094 redpill
redpill's picture

Ships break, icebergs happen.  We're taking on water but we haven't sunk yet and the band is playing.  We just need to test our hulls better in the future.

Thu, 08/02/2012 - 10:33 | 2672163 sodbuster
sodbuster's picture

And re-arrange the deck chairs!

Thu, 08/02/2012 - 10:39 | 2672188 malikai
malikai's picture

Sir, would you like to say anything to the hundreds of people jumping overboard into the icy water?

Thu, 08/02/2012 - 10:43 | 2672201 Turin Turambar
Turin Turambar's picture

Pull the fat lady off of the flotsam.  2 skinny people can be saved instead. ;-)

Thu, 08/02/2012 - 10:20 | 2672095 slyhill
slyhill's picture

This would be a brilliant attempt at taking the company private. But I think that is giving them too much credit...

Thu, 08/02/2012 - 10:21 | 2672098 DeadFred
DeadFred's picture

Nothing has happened here that a good number of puts and releasing the flash-crash algos won't take care of.

Thu, 08/02/2012 - 10:33 | 2672162 TheFourthStooge-ing
TheFourthStooge-ing's picture

We've managed to reduce headcount in IT, which should give us an end-of-quarter boost.

Thu, 08/02/2012 - 10:21 | 2672099 malikai
malikai's picture

As I said.

Deploy the Squid, prepare the Morgue.

Thu, 08/02/2012 - 11:16 | 2672345 disabledvet
disabledvet's picture

Same platform apparently...so certainly they could do it. "Motive, means and opportunity" problem again.

Thu, 08/02/2012 - 10:21 | 2672100 Captain Benny
Captain Benny's picture

Translation:  They haven't a clue where the bug originated or the triggering factors.

Thu, 08/02/2012 - 11:37 | 2672423 Carl Spackler
Carl Spackler's picture

Winner, winner, chicken dinner!

Captain Benny, you are the contest winner!

("Tell me what I won, Johnny...Well we have a beautiful package of NITE call options for you with a strike at $12.50/share.  Fun at parties.")

Thu, 08/02/2012 - 12:58 | 2672801 cougar_w
cougar_w's picture

They know what happened, but the fucking MBA CEO wouldn't be the one talking about it.

They probably already know everything. It's been 24 hours, they know everything. What nobody can explain is why the broken trades went out for 30 minutes. It would take less than 30 seconds to gracefully shutdown a bad market making engine, assuming one did not simply pull the network cables off the front.

Nobody was at the wheel, is why it went on. I wonder if their entire IT team is outsourced.

Thu, 08/02/2012 - 14:39 | 2673338 Overflow-admin
Overflow-admin's picture

Even if it was outsourced, it doesn't explain why there wasn't anybody or any TRIGGER (see the programming definition) to shut down the beast. Instead, me thinks, many, many triggers must have been disabled for this to happen. Take all the tapes as EVIDENCE and compare the database STORED PROCEDURES and TRIGGERS for your CONCLUSIONS.

That was a free IT advice.

Thu, 08/02/2012 - 10:21 | 2672101 Cult_of_Reason
Cult_of_Reason's picture

Headline reading algos are taking over the market again after this headline:

IMF says Fed should consider further securities purchases, especially MBS

Thu, 08/02/2012 - 10:21 | 2672103 Race Car Driver
Race Car Driver's picture

Glitchez, bitchez.

Thu, 08/02/2012 - 10:22 | 2672104 PicassoInActions
PicassoInActions's picture

i can provide a help with more testing ( over 15 yeas expirience ) with their clients money.

Thu, 08/02/2012 - 10:32 | 2672153 JohnG
JohnG's picture

 

 

Someone should tell the idiot that real code is tested into existence.  Only a certified fool would write code without first writing the tests.  THIS is how errors are prevented.

Thu, 08/02/2012 - 13:01 | 2672831 cougar_w
cougar_w's picture

I write code for a living. I've written some really complicated things but probably nothing close to what these guys are running. I don't think you can actually test code this complex. And since that is the case, they should not have access to anyone's money, and should have no Federal backups or bailouts.

Thu, 08/02/2012 - 18:59 | 2674280 ExpendableOne
ExpendableOne's picture

Hopefully the people who wrote it did not also do the testing.  Also, is it possible that someone was watching how this code performed?  Perhaps someone noted a pattern and took advantage of it....

Do NOT follow this link or you will be banned from the site!