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Knight's Berserk Algo Bought $2.6 Million Worth Of Stock Every Second

Tyler Durden's picture





 

While we already presented, courtesy of Nanex, the modus operandi of the Knight berserker algo, there was one outstanding question. What was the bottom line. And no, not how much the loss on Knight's Income Statement would be as a result of this glimpse into what really happens in the market: we already knew that would be $440 million. The question is what is the notional amount of stock that this algo bought in the 45 minutes in which it was operational. We now know: $7 billion. Or $155 million per minute. Or $2.6 million per second. Or, assuming the algo impacted just 150 stocks as previously reported, it was buying on average $17,333 in each name every second. Or, assuming an average stock price of the universe of 150 stocks of $30/share, the Knight algo lifted the offer roughly 600 times each second. For 45 minutes straight! That's right - the market making algorithm of a designated market maker which is responsible for 10% of the order flow in the US stock market, entered a pre-programmed mode (because the computer was told to do whatever it did by someone, and not without reason) that saw it buy up $2.6 million worth of stock every second.

Now there has long been speculation that HFTs are a central planner's best friend because they traditionally provide not only a floor to the stock market, but a gradual levitation bias especially in a low volume environment (as well as liquidity its advocates claim, but that is total BS - HFT only provides volume and churn - liquidity disappears at the drop of a bat when real selling pressure appears). They do this not because they are evil instruments of Bernanke collusion (although who knows) but simply because they accelerate and accentuate legacy momentum bias, which at least historically, has been up. Now in the aftermath of the Knight debacle we can also extrapolate what would happen if, say, reality were to creep in one day, and all those mutual and hedge funds which have carbon-based life forms making the buy and sell decisions suddenly decided to sell. Well, at $7 billion in 45 minutes, or 1/10th of the trading day, this means that had the Knight algo been running all day, it could have bought $70 billion worth of stock. Throw in the remaining flow routers, aka DMMs in the market which account for the remaining 90% of order flow, and we get a total of $700 billion in vacuum tube mediated purchasing power.

In other words, this is the market "worst case" shock absorber, or inverse escape velocity, that Bernanke has at his disposal if things turn sour. That said, with hedge funds, aka fast money, holding about $3 trillion in unlevered assets, and about $6-9 trillion with leverage (ignoring plain vanilla slow mutual funds), and one can see why not even the HFT levitation bid would be sufficient to offset a wholesale market dump.

There is one last open question remaining on Knight: what discount did Goldman extract out of the firm to rid it of its residual position which as the WSj explains declined slightly from its peak as "traders worked frantically Aug. 1 to sell shares while trying to minimize losses due to a software problem, ultimately paring the total position to about $4.6 billion by the end of the trading day" (one wonders if the market would have just blown up if the Knight algo were to run in reverse, and just take out layer after layer of bids to unwind the inventory asap). We now know thanks to the WSJ:

Knight avoided that scenario by agreeing in the early morning hours last Thursday to sell the portfolio to Goldman Sachs Group Inc.,  after rejecting an offer from UBS.

 

The terms sought by the banks reflected how dire Knight's situation was: UBS wanted an 8% to 9% discount on the position, according to people familiar with the matter.

 

The equities trading desk at UBS, headed by Mike Stewart, bid for the portfolio around 6:30 p.m. Wednesday, people familiar with the discussions said. Mr. Stewart was a former colleague of Knight Chief Executive Thomas Joyce's at Merrill Lynch. The talks with UBS fell apart later that night.

 

Goldman ultimately negotiated buying the portfolio at a 5% discount, or about $230 million less than the value of the stocks, the people said. That amount, not previously reported, represents more than half the loss Knight disclosed on Thursday that it incurred as a result of the technology errors.

 

The deal with Goldman allowed Knight to move ahead. Last weekend, Knight negotiated a rescue package with six financial firms that injected $400 million in capital in exchange for securities that can convert to ownership of 73% of the trading firm.

And now you know why having cash on your balance sheet in a ZIRP environment may well be the best investment, because just like Goldman, one never knows just where a slam dunk distressed opportunity could come from in exchange for an immediate 5% pick up.

More importantly, the Goldman deal demonstrates what the true liquidity cost is in this market when one wishes to do a wholesale stock transaction (either BWIC or OWIC): it is not less than 5% and tops out at 9%.

Keep that in mind, because if and when the day when VWAPing in and out of positions is no longer possible, each and every fund will have no choice but to assume a guaranteed 5% minimum (up to 9%) haircut on one's entire portfolio of allegedly liquid stocks.

We dread to think what the wholesale implied liquidity premium is on less liquid products than stocks, which nowadays is virtually everything...

* * *

Finally, we leave readers with yet another transformative animation from Nanex, after our first rendition of the "rise of the machines" back in February left many speechless, and which recently appears to have been rediscovered by some of the slower elements in the blogosphere. Why: because it's pretty, and we feel like it. And because it once again confirms that only vacuum tubes with infinite balance sheets should be gambling in this loaded market.

 


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Wed, 08/08/2012 - 23:01 | Link to Comment CalibratedConfidence
CalibratedConfidence's picture

sick ass chart

Wed, 08/08/2012 - 23:12 | Link to Comment strannick
strannick's picture

The Algo must've thought QE was just about to be announced.

Wed, 08/08/2012 - 23:26 | Link to Comment LetThemEatRand
LetThemEatRand's picture

Fucking bankers.

Wed, 08/08/2012 - 23:30 | Link to Comment Precious
Precious's picture

They didn't buy that.

Wed, 08/08/2012 - 23:48 | Link to Comment Ineverslice
Ineverslice's picture

I hate being Low Frequency.

Thu, 08/09/2012 - 00:44 | Link to Comment Cadavre
Cadavre's picture

We are all children sucking at the breast of Mother Quanta - what's this mean - is Knight HFT - or a minute tick frequency allocation plan shop. You'd think Knight was keen z`nuff on de survival skill stuff to not expose it's wide open chocolate highway to de MorgueSachBofA HFT conglomerate. Unless .. dey be bit actor in a remake of that very famous bail bait open de flood gates - mana rain from de sky - in 2008.

As understood, MorgueSachBofA's white patent leathered shod dandies bailed Knight . So next, guessing it be, DoT bail MorgueSachBofA, de FED bail DoT and the commons bail da FED?

It mighty wonderful indeedy, to have purpose in life.

But it's over - a wave hasn't crested at the shoreline line for several sets, De Omega Signal never lie - and dis time 666 feel like a hot rush fresh spoon fix.

There is no hedge - and Knight smells as fishy as Berskanks breath after he leaves the mens room at Luby's.

Thu, 08/09/2012 - 06:17 | Link to Comment GetZeeGold
GetZeeGold's picture

 

 

I hate being Low Frequency.

 

Go ahead and throw your tantrum little man.......it's 2.6 million for every second you hold your breath.

 

The good thing about being low frequency is it just costs about nickel....hell even I can afford that.

 

Thu, 08/09/2012 - 00:40 | Link to Comment 1fortheroad
1fortheroad's picture

So that explains the ramp job in the S&P futures ??

Magic no. 1401

Wed, 08/08/2012 - 23:59 | Link to Comment 11th_hour
11th_hour's picture

Somewhere in the darkness a certain programmer and his team leader are screwed forever.

Thu, 08/09/2012 - 00:49 | Link to Comment Dr. Engali
Dr. Engali's picture

No I'm sure that some competing firm would want them for espionage if nothing else.

Thu, 08/09/2012 - 10:20 | Link to Comment Cpl Hicks
Cpl Hicks's picture

Note to the CTRTK (Campaign to reelect The Kenyan):

Look into hiring this algo team to boost online fund raising.

That way Barry won't have to pimp out the First Wookie on those demeaning 'Dinner with Barack and Michelle' ads.

Thu, 08/09/2012 - 03:40 | Link to Comment philipat
philipat's picture

StuxNet for Finance 1.01. Developed in Israel, Iran, China or by GS?

Think about it for a minute. Most software, with the exception of MS of course, is pretty stable and doesn't suddenly do strange things like this?

Thu, 08/09/2012 - 08:46 | Link to Comment NoClueSneaker
NoClueSneaker's picture

GS.

Reggie spiked the squid. Looting is Lloyds one trick pony.

 

Wed, 08/08/2012 - 23:02 | Link to Comment bugs_
bugs_'s picture

that is awesome

the programmer must be identified

FOR THE GLORY

Thu, 08/09/2012 - 00:43 | Link to Comment Never One Roach
Never One Roach's picture

"Corzine could not be reached for comment on this developing situation. Stay tuned."

Wed, 08/08/2012 - 23:02 | Link to Comment SolidSnake961
SolidSnake961's picture

all your stocks are belong to us

Wed, 08/08/2012 - 23:05 | Link to Comment kneelb4me
kneelb4me's picture

nice.

Wed, 08/08/2012 - 23:13 | Link to Comment putaipan
putaipan's picture

squid pro quo?

Thu, 08/09/2012 - 06:42 | Link to Comment Mentaliusanything
Mentaliusanything's picture

But Goldman may have brought a pup. so it may be skid pro quo. 5% in a dump that amount will leavea stain yo muma cant take out

Wed, 08/08/2012 - 23:04 | Link to Comment The Wizard of Oz
The Wizard of Oz's picture

SICK ASS CHARTS BITCHEZ!!!!

Wed, 08/08/2012 - 23:04 | Link to Comment HedgeAccordingly
HedgeAccordingly's picture

"slower elements of the blogosphere" 

Wed, 08/08/2012 - 23:05 | Link to Comment Fail2Deliver
Fail2Deliver's picture

Is that buying number offset by the selling number? I know a stock I own (CVS) got clubed like a baby seal that morning

Thu, 08/09/2012 - 00:04 | Link to Comment Snidley Whipsnae
Snidley Whipsnae's picture

"Is that buying number offset by the selling number?"

The capability to print/create electronic stock certificates has stayed abreast of berserk algos on buying frenzies.

Now there exist algos that do nothing but wait for other algos to go nuts... or, if they don't exist they will soon... naked longs?

Or maybe some algos get bored and party hardy like the occasional postal worker, movie goer or drunken sailor?

Skynet taking over?

 

Wed, 08/08/2012 - 23:07 | Link to Comment jonjon831983
jonjon831983's picture

Wow, well done.  Interesting point about the 5-9% discount range... but this is an environment one one going haywire.  What if it was more than one or in a scenario where market in general is tanking?

Thu, 08/09/2012 - 01:26 | Link to Comment Dr Benway
Dr Benway's picture

Yeah that is the key point for sure. And you're right, this is in a normal market situation with stocks that were thought to be liquid.

 

A metric shit-ton of shares crossheld by financial institutions is marked at entirely unrealistic values. The inflated share prices turn into inflated NTAs.

 

To paraphrase another post: "The value can only be known by collapsing it"

Wed, 08/08/2012 - 23:08 | Link to Comment Nid
Nid's picture

But what about the 4 million shares of a fairly illiquid preferred that the algo shorted and flash-crashed that same morning?

Wed, 08/08/2012 - 23:34 | Link to Comment putaipan
putaipan's picture

hey nid....i'm givin' you a little greenie. and i don't even have a clue as to what it is you said means. any'a you guys? any translations for the slower readers of the bloggosphere amongst us. if it happened i'd like to know...enquiring minds an' all. 

Thu, 08/09/2012 - 00:03 | Link to Comment jonjon831983
jonjon831983's picture

Hmm didn't read that Preferreds were effected by this.

 

@putaipan - not sure which part you might need some splainin on.

 

Preferred shares = special non-voting class of company shares which generally pay out fixed* dividend and are issued at a set price (usually $25.00).  Like regular common shares that we hear on TV they can be traded on an exchange and the price fluctuates.  http://www.investopedia.com/terms/p/preferredstock.asp

 

Illiquid = not a lot of volume.  So not a lot of people are trading these things and you can see a big difference between the Bid / Ask.  If you compare the common shares of a company to their preferreds, you can see 100x the volume of what has been traded.

 

Algo = algorithm, kinda like a programmed formula (secret sauce that somebody thinks will make money) so trades are executed automatically by a computer.

 

Flash crash = when the Algo goes crazy... crazy enough to effect the price of whatever it is trading. A la May 2011 when the DowJones dropped 1000 points for a few minutes.  This post about Knight Capital is another example.

 

Hopefully this explains a bit?

Thu, 08/09/2012 - 01:04 | Link to Comment Nid
Nid's picture

JWF....WFC pref issue. Trades about 40k shs/day....KCG algo banged it for 4 million shs and a 10% decline in 20 mins.

Thu, 08/09/2012 - 01:12 | Link to Comment putaipan
putaipan's picture

which part? the whole thing . which you answered in your first sentence....thnx. you're all tylers here. as for the rest of your post...yeah me and probably a lot of others. so- double tthanks. i needed help with "illiquid prefered".

real time edit- but nid's namin' names so....let the information flow!(luuuucy....jd'you gotta lotta 'splainin' to do........)

Thu, 08/09/2012 - 00:07 | Link to Comment Snidley Whipsnae
Snidley Whipsnae's picture

Even Jesse Livermore might find this a tough mkt to trade...

Thu, 08/09/2012 - 00:50 | Link to Comment Pareto
Pareto's picture

Jesse would walk away.  Even he would not be able to read the tape anymore.  Perhaps i am naive, but, originally i thought the algo smackdowns and what not wouldn't affect me.  But, here's what I envision.  With that almost infinite level of capital (leveraged) at you and your algo's disposal, you could, using an algo that takes into account total share float, and net short positions, take a stock" price so high that u flush out the shorts (if the algo sees that the math and price elasticity makes sense to do so), and have the price break even higher, so that while the shorts are covering, the algo is selling that same stock it just bid up into strength by more than the buying they executed during the stock's weakness.  Its like there is never any intent for the algo to do anything other than manipulate stock prices to change existing positions behaviour to make the spread between buying into weakness and selling into strength.  Call writers must be pulling their hair out.  Even on neutral days, they are getting hit in the nut sack everyday.  The tick is behaving like a shy choir girl; the shorts are peaking around the corner for the all clear and seconds later are getting smoked by a MAC truck.  I have a huge amount of respect for the shorts in this market because they are the true price discoverers.  But, IMO these algos are crushing them day in and day out.  Its like the exact opposite when the longs throw in the towel.  I think the shorts have gone back to the war room to figure shit out, because the algos are not even letting them scalp 0.1%.  This market is not going to go down anytime soon, and I think eerily, that everybody knows it, including the shorts.  Bad news, bad numbers, bad whatever, this market is going up.  What is it that I see on ZH...."BTFD Bitchez".  Thats all traders have, IMO.

Thu, 08/09/2012 - 02:24 | Link to Comment Dr Benway
Dr Benway's picture

yeah all humbug

Thu, 08/09/2012 - 08:12 | Link to Comment stocktivity
stocktivity's picture

It's all Bullshit!

Wed, 08/08/2012 - 23:06 | Link to Comment Neethgie
Neethgie's picture

wonder what would happen if one went batshit insane on $AAPL how many hedge funds would get blown up in half an hour.

Thu, 08/09/2012 - 00:18 | Link to Comment Yamaha
Yamaha's picture

Great thought. Steve Jobs and Elvis would come back and cancel the trades....

Wed, 08/08/2012 - 23:07 | Link to Comment chump666
chump666's picture

oh man i am speechless...

so awesome to watch

Wed, 08/08/2012 - 23:11 | Link to Comment A Lunatic
A Lunatic's picture

I hear the TSA developed an algo that buys 2.8 million worth of coke and hookers every second.........

Wed, 08/08/2012 - 23:43 | Link to Comment hannah
hannah's picture

more like diet coke and little children....

Wed, 08/08/2012 - 23:15 | Link to Comment I am a Man I am...
I am a Man I am Forty's picture

Were they allowed to buy that much stock?

Wed, 08/08/2012 - 23:24 | Link to Comment Dr. Engali
Dr. Engali's picture

Millions of people get their statements every month thinking they have accumulated wealth , when in reality it can all evaporate in the blink of an eye.

Wed, 08/08/2012 - 23:31 | Link to Comment Fail2Deliver
Fail2Deliver's picture

@Drengal...

Or the "wealth" is not there at all

Thu, 08/09/2012 - 06:55 | Link to Comment Mentaliusanything
Mentaliusanything's picture

Yes price discovery can clear your bowels better than week old KFC and slale beer.

Wed, 08/08/2012 - 23:49 | Link to Comment AurorusBorealus
AurorusBorealus's picture

You just cannont convince most Baby Boomers in America of this, or even young people.  They just do not know hardship in the way that those who experienced the Depression do.  Try to explain to anyone in American under 70 why the eldest generation does not trust banks, keeps money in cash, has gold; they just don't understand; and my experience with Europeans is the same.  They just do not know hardship... and this is the cultural reason why such excess occurs in the West... it is a cultural decadence... a lack of understanding about the serious consequences of failure... the precarious nature of life.

Wed, 08/08/2012 - 23:52 | Link to Comment Dr. Engali
Dr. Engali's picture

Unfortunately they are about to find out the hard way.

Thu, 08/09/2012 - 07:07 | Link to Comment Papasmurf
Papasmurf's picture

Failure is not possible when you have Ctl-P.   With 3D printing, you can even print food.

Thu, 08/09/2012 - 08:15 | Link to Comment stocktivity
stocktivity's picture

That is the illusion Ben must maintain at all costs.

Wed, 08/08/2012 - 23:21 | Link to Comment pd45
pd45's picture

New Olympic event. "Not So Syncronized Trading"

Thu, 08/09/2012 - 06:22 | Link to Comment GetZeeGold
GetZeeGold's picture

 

 

Stuck the landing only to find out there's not hardly any gold in that gold medal.......freakin screwed again.

 

Wed, 08/08/2012 - 23:25 | Link to Comment AurorusBorealus
AurorusBorealus's picture

A human trader with substantial patience and a long attention span can beat the game.  (Human traders made mincemeat of the rogue algo, just as well as the machines.)  I remember in online poker when quants were introduced (circa 2004-2005).  They based every decision off a statistical evaluation of your previous play against them.  Once you knew the opponent was a quant, which you could only know by experience, patience, and attentiveness, the quants were easily beatable... in fact the easiest opponents to beat.  I was not the only online pro to figure this out... and that is why quants no longer play poker; their owners felt the pain, after some early easy money (for maybe 6 months or a year).

Thu, 08/09/2012 - 02:08 | Link to Comment Likstane
Likstane's picture

Ok, I'm ready to take on the machines.   I've got a new E machines hard box portable  with Windows Vista II that I pirated from my Broker brother.   My Wi-Fi has been upgraded to maximum input and the new light sensor mouse should help with the click-to-buy.  I will be at Mcdonalds before they open so I can get the closest booth to the signal.  At 6am I will already have pounded 3 redbulls and will be working my finger exercises to be ready with the insta-purchase option that comes with my TD waterhouse account.  Those machines don't stand a chance. 

Thu, 08/09/2012 - 08:12 | Link to Comment Papasmurf
Papasmurf's picture

After eating your sausage & egg with hash brown, you could suffer a bad trade from fatty fingers.

Wed, 08/08/2012 - 23:35 | Link to Comment reader2010
reader2010's picture

Here is the latest from the front:

China and North Korea are implementing a labor program under which China will allow 40,000 North Koreans to work in factories in northeastern China. A garment factory in Tuman, Jilin, a town on the North Korea border, has hired 145 North Korean women and Hunchun, Jilin is finalizing a deal to import North Korean workers. The Tuman workers are provided living quarters and paid 1500 yuan per month, of which the North Korean authorities take an 80 to 90 percent cut, Japan’s Kyodo news agency reports. The program is part of Pyongyang’s effort to expand its labor export program to earn foreign exchange. 

http://mainichi.jp/english/english/newsselect/news/20120731p2g00m0in024000c.html

Wed, 08/08/2012 - 23:54 | Link to Comment jonjon831983
jonjon831983's picture

Yep, makes sense, been saying China will likely outsource to North Koreans as new source of cheap labour and probably only country with direct access to North Korea.

Another choice of course is Africa.

Thu, 08/09/2012 - 00:17 | Link to Comment Snidley Whipsnae
Snidley Whipsnae's picture

reader... So, the wealthy French are not getting as good a deal as the N Korean workers (considering free living qtrs)?

" of which the North Korean authorities take an 80 to 90 percent cut,"

France wants to tax high income earners at 75%

In addition, marginal tax rate under FDR reached ~ 95%

There is nothing new under the sun... King Solomon

Thu, 08/09/2012 - 00:20 | Link to Comment reader2010
reader2010's picture
that's how "money for nothin' and chicks for free."
Wed, 08/08/2012 - 23:36 | Link to Comment Precious
Precious's picture

Goldman took the portfolio?  And the market rocketed up this week for no apparent reason?  Gee.  What a coincidence.  Couple of phone calls. Problem solved.  Thanks BB.

Thu, 08/09/2012 - 00:50 | Link to Comment 1fortheroad
1fortheroad's picture

Blame it on Gravity, its pulling all the market up.

 

 

Its an upside down world doncha you know.

 

Wed, 08/08/2012 - 23:38 | Link to Comment max2205
max2205's picture

Trump got divorced 5 times for the same reason

But he still remarries.....insanity?!?

Thu, 08/09/2012 - 00:19 | Link to Comment Snidley Whipsnae
Snidley Whipsnae's picture

"Trump got divorced 5 times for the same reason

But he still remarries.....insanity?!?"

It would only be insanity if he married the same one five times... imo.

 

Wed, 08/08/2012 - 23:39 | Link to Comment dunce
dunce's picture

A common programing instruction is a "if then " statement. The idea must have been to make a small amount on each transaction of market making and instead was losing a small amount on a huge number of transactions in a cascade system.

Wed, 08/08/2012 - 23:59 | Link to Comment AlaricBalth
AlaricBalth's picture

You get a green for that...and a C++

Wed, 08/08/2012 - 23:49 | Link to Comment Paul67
Paul67's picture

It was a bug Dave…..I feel a lot better admitting that now…..

Wed, 08/08/2012 - 23:56 | Link to Comment Josh Randall
Josh Randall's picture

 $17,333 in each name every second -- Nice Masonically numbered Algo formula

Wed, 08/08/2012 - 23:59 | Link to Comment Antifaschistische
Antifaschistische's picture

You won't find the rogue programmer...he's sipping Mai Tai's on the shore of his new Carribean Luxury Home...oh, yah, he used to work for Goldman.

Thu, 08/09/2012 - 00:03 | Link to Comment Nobody For President
Nobody For President's picture

What I cannot comprehend is why is took so impossibly long to shut this mfer down? A (rumored?) new program put online, then everybody went out for coffee? WTF? Is this big time market maker, with light speed computers, have a management decision chain so inept it takes 30 plus minutes to make a decision? Apparentlly the NYSE called Knight fairly early on to ask 'whatup?', and this insane program continued to run for another 20 minutes plus.

It is one thing for a programmer, or programmer group, to screw up - but where the hell were the 'deciders'? Where the hell was the chain of command? Was it like HAL - had to blow off the doors of the computer center to gain entry to the plug? It seems like a huge chunk of the so called management team at Knight needs to be booted out the door.

Does anybody, inside or outside the outfit, know why it took so damn long to terminate this algo gone amuck - a for real WOPR?

Thu, 08/09/2012 - 01:35 | Link to Comment Dr Benway
Dr Benway's picture

THIS. If I understand it correctly most HFT firms would have noticed something wrong much earlier and pulled the plug, even if just the market was behaving weirdly.

Thu, 08/09/2012 - 00:04 | Link to Comment michael_engineer
michael_engineer's picture

Regarding HFT :

As a software engineer with market insights, I suspect that the quick algo swings up and down (and sometimes as shown at ZH before (http://www.zerohedge.com/article/fractial-limit-order-buster-latest-mark...) as growing in amplitude) are designed to increase nervous tensions that result in people or other algo's to adjust their limit orders or stop loss orders on both stocks and options. The algo may probe then stand back for 5 to 30 minutes to watch for changes then probe again. After determining weakness or panic then the algo can swing in for the profits such as in a short covering period.. An algo like this could easily be used in situations where the bid ask spread is large so no trades would even likely result but the information gained by watching the changes to the bids, asks, and limits in the next few minutes could be analyzed for exploitation.

Another manipulation could be to alter the true bid/ask prices towards the direction you want a stock to move, even though no trades may have occurred. The wildly swinging prices on sweeping orders might allow a trading house to claim any value in the swept through price range as the bid and ask values even though there was never any intent for the HF trade order to execute. An algo could even report one bid/ask spread to someone positioned long and a different spread to someone positioned short, and both of those bid ask ranges may have been true in the previous second. Does anyone know if the bid/ask spreads for all customer inquiries (or data pumps or data feeds) has ever been examined to look for a customer by customer bias where short and long positions are given slightly different sets of data?

That's how I would design the logic.

Statistics could be kept and a trading algo could become very confident in the outcomes. If an algo has been run hundreds of thousands (or even millions) of times in the past and fine tuned from the knowledge gained, then it could easily recognize places for it to attempt to step in with a trading strategy that has proven itself as successful in similar scenarios in the past. Part of the quants jobs are to quantify statistically the success of algorithms tried out on the markets

Thu, 08/09/2012 - 00:16 | Link to Comment jonjon831983
jonjon831983's picture

Algo wars

Thu, 08/09/2012 - 08:15 | Link to Comment falak pema
falak pema's picture

bots and quaint quant twots! 

Thu, 08/09/2012 - 01:06 | Link to Comment prains
prains's picture

don't you just love a market based on an honest buyer and seller of goods

Thu, 08/09/2012 - 00:39 | Link to Comment adr
adr's picture

Is there any true purpose for trading stocks anymore? Actually it is a serious question.

Can we just have a whole bunch of speculators bet on grains of sand in jars or something that doesn't allow a computer program to evaporate a life's earnings in a hundredth of a second. Or cause my wallet to get thinner as I have to pay double the price for everything.

Is there really any difference anymore. Actual business seems to have no bearing on the market. I feel the market is like the storage locker program where each guy tries to make the other guy overpay for something each of them knows is garbage. The winner is really the broker that gets paid whether the guys make money or lose their shirt.

I think I answered my question.

Thu, 08/09/2012 - 00:53 | Link to Comment Walt D.
Walt D.'s picture

They outspent Congress for 45 minutes! Wow!

Thu, 08/09/2012 - 01:02 | Link to Comment Pubcoceo
Pubcoceo's picture

I'm still wondering if that was the plunge protection team in action fearing tha repercussions of the omega trade day before on those 60000 e minis?..

Thu, 08/09/2012 - 09:54 | Link to Comment optimator
optimator's picture

Sorry, we just get a very little peek behind the curtain once in awhile.

Thu, 08/09/2012 - 01:10 | Link to Comment Dividist
Dividist's picture

I guess I am among  the "slower elements of the blogosphere" who only recently discovered and reposted the "Rise of the Mchines" animation.  By way of explantion, there are some of us who require two or three kicks to teeth before we begin wondering about the relative merits of walking behind an ornery ass.  Anyway, thanks for the great work here on the HFT issue. I only started digging after the KCG debacle hit the news, and your posts provided an invaluable education. 

Listening to the HFT apologists on CNBC over the last few days.  It seems they feel their algos should not be constrained by anything but the limits of the technology - the speed of the hardware and network. I'd think this notion can be rebutted with a reductio ad absurdum. We know via Moore’s laws and computing history that computers will only continue to get faster and more powerful.  Consider the consequences when within a few years or decades the total number of transactions described in this post to buy $9B of stock in 45 minutes can be executed in 45 milliseconds. Who is going to pull the plug on that mistake? Instead of taking 45 minutes to destroy a company, a company could conceivably be destroyed in less than a second after deploying a flawed algorithm. What happens when a company with $300 million in cash loses – not $440 million – but $10 Billion? $1 Trillion? What happens to the market then? How does that get sorted out? It sounds absurd, but if the Knight Capital FU informs us of anything, it is that this is certainly possible. And if it is possible, despite all low frequency human efforts to anticipate and code around it, we know Murphy will eventually make it so.

Thu, 08/09/2012 - 01:22 | Link to Comment putaipan
putaipan's picture

moore's laws acts to exponentially highten the effects of murphy's....shit's defintely gonna happen. 

Thu, 08/09/2012 - 01:43 | Link to Comment StychoKiller
StychoKiller's picture

Bottom line:  do NOT arm-wrestle with a 'bot (unless you don't care if your arm gets pulled off!)

Thu, 08/09/2012 - 01:13 | Link to Comment Nid
Thu, 08/09/2012 - 01:36 | Link to Comment Pan dora
Pan dora's picture

"There is one last open question remaining on Knight: what discount did Goldman extract out of the firm to rid it of its residual position which as the WSj explains declined slightly from its peak as "traders worked frantically Aug. 1 to sell shares while trying to minimize losses due to a software problem, ultimately paring the total position to about $4.6 billion by the end of the trading day" (one wonders if the market would have just blown up if the Knight algo were to run in reverse, and just take out layer after layer of bids to unwind the inventory asap). "

The parenthesis asks a great question.  It seems as if algos need to have some type of realtime feedback, stop/loss, or mitigating scenario.

Sorry, I forgot my manners--BITCHEZ!

Thu, 08/09/2012 - 02:09 | Link to Comment etresoi
etresoi's picture

Can one purchase $7,000,000,000. of stocks, with $400,000,000. of capital?  What is that 18-19:1 leverage?

Thu, 08/09/2012 - 08:17 | Link to Comment Papasmurf
Papasmurf's picture

That's modest leverage by today's standards.

Thu, 08/09/2012 - 11:03 | Link to Comment Pubcoceo
Pubcoceo's picture

Mother of all margin calls...haaaaahaaaa

Thu, 08/09/2012 - 02:29 | Link to Comment vertexa
vertexa's picture

Peter Schiff - Gold & The Perfect Storm That Will Lead To Collapse

Peter Schiff continues: 

 

“Everybody is waiting for the other shoe to drop for the price of gold.  If you look at the price of gold stocks, p/e multiples, the assumption must be that earnings are going to fall sharply.  That’s based on the idea that gold prices  are going to go down.

Thu, 08/09/2012 - 03:12 | Link to Comment Gief Gold Plox
Gief Gold Plox's picture

I still can't agree with the notion that the whole knightmare was unintentional. I know very little about HFT algos, but common sense would dictate that in order to speed-up the market maker, there would be no single instance of the algo, but spread out over several CPUs, if not several farms, each with it's own fiber-optic hookup to the NYSE. That being the case, there would absolutely have to be a monitoring tool, with the sole purpose of making sure that instances are working as designed, following the same basic strategy i.e. not working against each other.

The fact that it took over half an hour to pull the kill switch seems very suspicious.

Thu, 08/09/2012 - 03:19 | Link to Comment Element
Element's picture

It's only fractional-reserve fiat, no biggie.

Thu, 08/09/2012 - 03:24 | Link to Comment mrpxsytin
mrpxsytin's picture

 

Wonder when this will happen for real...

Thu, 08/09/2012 - 05:31 | Link to Comment Hype Alert
Hype Alert's picture

I guess those plugged in HFT's don't have margin limits either.

Thu, 08/09/2012 - 06:13 | Link to Comment Obadiah
Obadiah's picture

Wheres Jonny Corzine?

Thu, 08/09/2012 - 06:33 | Link to Comment falak pema
falak pema's picture

the HFT conundrum is accelerating the law of diminishing returns, on artificially pumped risk assets,  to its asymptote .

When we take fiat concoction and dissemination  to limits unsustainable we hit the wall.

As that very dissemination and propogation saturate the markets making risk systemic.

A real wall meets a tide made of a bubble of froth; and then there is free fall as the froth loses its cohesion.

We go bankrupt slowly for a long period, down that oligarchy powered fiat bubble inflated road, until we suddenly fall over the cliff; very unexpectedly, when the fog clears and the froth is shown to be what it is to all of the protagonists of this charade now bled out of bullets, central banking czars without any real clout; alas, this includes the end victims : the people in free fall.

That is a very dangerous moment in society as mass desperation is something whose outcome can never be pre-programmed like an algorithm. Do the central  bankers have the answer to this impending capital implosion? Before we reach that cliff?

There is ONLY one issue possible : close down the global markets, the anarchial thermometer of our impending system failure. Making the system blind buys time and makes fake monetary policy a global DICTAT without market arbitrage! The world now is a true feudal empire at global level. The Oligarchical gods will then appoint a Hercules to clean out the financial stables. Then re-establish a semblance of markets and democracy. That is the NWO game plan by the looks of it, to save their power and fortunes. 

We may be heading there!

But there are so many thieves out there. One thing is for sure as its the very essence of human nature : thieves ALWAYS fall out...what makes man corrupt is more powerful than what makes him noble. In fact nobility is ONLY acquired in periods of great suffering and sacrifice! 

So fasten seat belts, as this global roller coaster is on a crazy algorithm programmed to never make an about turn. And we know what the issue there is, when all roads lead to the "moscow" moment of despotic desperation.

There is no Caesar out there to bring world order in empire!

Pax Americana is now faced with its own nemesis; totally self created, a morphed capital destruction machine algorithmically fed on bubble steroids! 

Thu, 08/09/2012 - 06:32 | Link to Comment Obadiah
Obadiah's picture

This was just a trial run, test market for the real theft plan in the future. This was no mistake.

Thu, 08/09/2012 - 07:33 | Link to Comment disabledvet
disabledvet's picture

Apparently the NYSE Group "unleashed their trading algo's" from their purchase of the Euro-next that day. The story has been a "fail to communicate." "Their algos had an argument and the Knight lost."

Thu, 08/09/2012 - 06:38 | Link to Comment tradewithdave
tradewithdave's picture

"Technology good," Bart Simpson CFTC at the HFT conference in July 2012 in his best caveman imitation... and there's video.

www.tradewithdave.com

Thu, 08/09/2012 - 07:08 | Link to Comment Venerability
Venerability's picture

Clearly, they must have copied their algorithm from JPM's London operation, which sells at least that much Paper Silver every nanosecond. 

Thu, 08/09/2012 - 07:22 | Link to Comment mayavision2012
mayavision2012's picture

[on Dave's return to the ship, after HAL has killed the rest of the crew]
HAL: Look Dave, I can see you're really upset about this. I honestly think you ought to sit down calmly, take a stress pill, and think things over.

Thu, 08/09/2012 - 07:24 | Link to Comment campag
campag's picture

Can some please explain. As Knight were leveraged 19;1. If  the market fell by 10% (possible) they would have lost   $700,000,000- with capital only of $400,000,000 who would betaking the $300,000,000 loss. Who is the last guarentor ?? Who allows such leverage ??

Thu, 08/09/2012 - 07:37 | Link to Comment disabledvet
disabledvet's picture

The question that should be asked in these here parts is "how to rebuild a trading platform from such a catastrophic event." The answer of course is BILLIONS. Hence "goodbye Knight!" another question that isn't asked but should be is "what else runs on a software platform in an economy?" and the answer to that is "pretty much everything!" (think distribution, buying a plane ticket, getting your mail--ALL run on software "trading platforms" now.) sounds like a big issue. Good thing the Government can't wait to secure the on-line space!

Thu, 08/09/2012 - 08:20 | Link to Comment chinaboy
chinaboy's picture

Great article.

Can zerohedge please also help us understand how knight can  buy at $155 mln/minute? Since we know it did not have that kind of money. This kind of "margin account" is facianating. It kills the company more than the code.

Thu, 08/09/2012 - 10:40 | Link to Comment Cpl Hicks
Cpl Hicks's picture

"only vacuum tubes with infinite balance sheets should be gambling in this loaded market."

Are you really suggesting that Benny B should be rolling the dice with the full faith and good credit of the USA on the table?

Thu, 08/09/2012 - 12:09 | Link to Comment covert
covert's picture

that kind of discounting isn't legal in the usa.

http://expose2.wordpress.com/2011/11/20/a-voice-from-the-dark/

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