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.

Your rating: None

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Wed, 08/08/2012 - 23:01 | 2689873 CalibratedConfidence
CalibratedConfidence's picture

sick ass chart

Wed, 08/08/2012 - 23:12 | 2689917 strannick
strannick's picture

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

Wed, 08/08/2012 - 23:26 | 2689961 LetThemEatRand
LetThemEatRand's picture

Fucking bankers.

Wed, 08/08/2012 - 23:30 | 2689967 Precious
Precious's picture

They didn't buy that.

Wed, 08/08/2012 - 23:48 | 2690010 Ineverslice
Ineverslice's picture

I hate being Low Frequency.

Thu, 08/09/2012 - 00:44 | 2690099 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 | 2690290 GetZeeGold
GetZeeGold's picture



I hate being Low Frequency.


Go ahead and throw your tantrum little'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 | 2690094 1fortheroad
1fortheroad's picture

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

Magic no. 1401

Wed, 08/08/2012 - 23:59 | 2690028 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 | 2690105 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 | 2690944 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 | 2690220 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 | 2690509 NoClueSneaker
NoClueSneaker's picture


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


Wed, 08/08/2012 - 23:02 | 2689878 bugs_
bugs_'s picture

that is awesome

the programmer must be identified


Thu, 08/09/2012 - 00:43 | 2690096 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 | 2689879 SolidSnake961
SolidSnake961's picture

all your stocks are belong to us

Wed, 08/08/2012 - 23:05 | 2689890 kneelb4me
kneelb4me's picture


Wed, 08/08/2012 - 23:13 | 2689925 putaipan
putaipan's picture

squid pro quo?

Thu, 08/09/2012 - 06:42 | 2690307 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 | 2689882 The Wizard of Oz
The Wizard of Oz's picture


Wed, 08/08/2012 - 23:04 | 2689883 HedgeAccordingly
HedgeAccordingly's picture

"slower elements of the blogosphere" 

Wed, 08/08/2012 - 23:05 | 2689892 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 | 2690040 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 | 2689895 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 | 2690135 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 | 2689896 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 | 2689977 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 | 2690036 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.


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 | 2690121 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 | 2690126 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 | 2690047 Snidley Whipsnae
Snidley Whipsnae's picture

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

Thu, 08/09/2012 - 00:50 | 2690106 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 | 2690139 Dr Benway
Dr Benway's picture

yeah all humbug

Thu, 08/09/2012 - 08:12 | 2690409 stocktivity
stocktivity's picture

It's all Bullshit!

Wed, 08/08/2012 - 23:06 | 2689898 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 | 2690069 Yamaha
Yamaha's picture

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

Wed, 08/08/2012 - 23:07 | 2689903 chump666
chump666's picture

oh man i am speechless...

so awesome to watch

Wed, 08/08/2012 - 23:11 | 2689915 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 | 2689996 hannah
hannah's picture

more like diet coke and little children....

Wed, 08/08/2012 - 23:15 | 2689932 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 | 2689947 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 | 2689969 Fail2Deliver
Fail2Deliver's picture


Or the "wealth" is not there at all

Thu, 08/09/2012 - 06:55 | 2690315 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 | 2690006 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 | 2690017 Dr. Engali
Dr. Engali's picture

Unfortunately they are about to find out the hard way.

Thu, 08/09/2012 - 07:07 | 2690324 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 | 2690413 stocktivity
stocktivity's picture

That is the illusion Ben must maintain at all costs.

Wed, 08/08/2012 - 23:21 | 2689948 pd45
pd45's picture

New Olympic event. "Not So Syncronized Trading"

Thu, 08/09/2012 - 06:22 | 2690291 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 | 2689954 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).

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