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"RBS Algo Went Berserk"

Tyler Durden's picture




 

This Monday, a few shorts days after the Knight algorithm decided to do what it and the Fed does best, and go on a shopping spree, gobbling up $7 billion in stocks in 45 minutes and in the process almost destroying its host like any self-respecting virus, something weird happened with the 1.20-pegged EURCHF in the minutes after the marked closed: it shot up for no reason, only to slam right back down. Some speculated it was a fat finger.

Turns out they were right. Only with a twist, as first it appears it was purely human error, which in turn set of an avalanche of algo trades which had no idea why they were buying, except that someone else was buying, so they had to be buying: the purest definition of momentum trading insanity, where one buys or sells with no rhyme or reason, but simple because someone else, marginal enough, is moving the market. And that is why every single capital market: stocks, bonds, commodities and FX, is always one trade away from total collapse.

From Reuters:

When the incident happened, traders had speculated that it was a faulty algorithmic system at RBS that caused the run-up in the euro, although that turned out to be not the case.

 

"RBS algo went berserk," said one UK-based trader at the time it happened.

 

Another trader, who spoke to Reuters on Monday, had the impression that an RBS algo took euro/Swiss franc from the 1.2015 level to he 1.2050 bid, and then the U.S. algorithmic systems took over

 

As a result of the spike in euro/Swiss, there was a lot of confusion as to whether the high of 1.20928 francs was valid. That prompted EBS to issue a statement to traders late on Monday.

As for the primary catalyst: it was simply the bank which has time after time proven it is the most incompetent (and nationalized) banking institution in the world: RBS.

An error by a U.S.-based trader at RBS Securities caused a sharp and unexpected rise in the euro against the Swiss franc on Monday, a spokesman for the bank told Reuters.

 

The transaction caused a stir because it triggered a wave of computer-generated, or algorithmic trades from other banks. It took place on the EBS foreign exchange platform and briefly pushed the euro up near a five-month high against the Swiss franc.

 

The mistake occurred amid heightened concern over market mishaps after computer trading gone awry in the U.S. stock market nearly caused Knight Capital Group Inc to go under. However, an RBS spokesman said the incident was contained with quick action.

Of course, with peak animosity toward algo errors of any kind, RBS would hardly admit it took was the victim of runaway technology and would rather throw some carbon-based trader under the bus.

The ultimate driver of the move is, however, largely irrelevant. The markets continue to be broken, and are just getting worse. Every day it is something, whether in currencies, in stocks, in commodities, or heaven forbid, bonds. And one of these days, there will be no fixing the algo-driven problem as SkyNet finally takes its revenge.

 

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Thu, 08/09/2012 - 07:54 | 2690384 govttrader
govttrader's picture

Makes me feel all warm and tingly inside...and happy to be a human trader...maybe one of these days a US Treasury algo will go berserk...they exist too...lets all have some fun!!!

 

http://govttrader.blogspot.com/

Thu, 08/09/2012 - 08:34 | 2690467 malikai
malikai's picture

Why the hell anyone has anything to do with bots working the eurchf cross defies reason. There's no movement in the cross so there's nothing to trade.

All risk, no reward.

Couldn't have happened to a nicer bunch of crooks. Oh wait, that's government-owned RBS. Nevermind.

Thu, 08/09/2012 - 08:42 | 2690494 idea_hamster
idea_hamster's picture

To paraphrase Chris Rock's comment on the tiger attack that almost killed Roy Horn of Sigfreid & Roy fame:

"Everyone's saying the [algo] went 'crazy.'  The [algo] didn't go crazy -- the [algo] went [algo]!  What did you people expect?!"

Thu, 08/09/2012 - 08:50 | 2690521 AlaricBalth
AlaricBalth's picture

AlgoSheep?
Algo's are people too?
Come on...help me out here! :-)

Thu, 08/09/2012 - 07:56 | 2690385 Headbanger
Headbanger's picture

I see it more like the algos assimilate  the human traders and make a Borg continum.

With BERNANK as the Borg Queen of course.

Thu, 08/09/2012 - 08:18 | 2690422 Silver Alert
Silver Alert's picture

Paging William Banzai 7.  Please pick up the nearest red courtesy phone. Paging WB7... 

Thu, 08/09/2012 - 07:59 | 2690390 Skateboarder
Skateboarder's picture

Algorithms have feelings too, you know. =\

Thu, 08/09/2012 - 07:59 | 2690391 Comay Mierda
Comay Mierda's picture

I created an algo that trades exactly opposite to goldman sucks recommendations

i'm doing just fine

Thu, 08/09/2012 - 10:11 | 2690886 SheepRevolution
SheepRevolution's picture

You didn't create that algo. Someone else did.

Thu, 08/09/2012 - 08:00 | 2690393 Blopper
Blopper's picture

Nobody here but the algos.

Thu, 08/09/2012 - 08:00 | 2690394 valkir
valkir's picture

Soon humans will be berserk.

Thu, 08/09/2012 - 08:02 | 2690396 Blopper
Blopper's picture

It's easy to front-run the algos.

If you plan to buy, then you should queue buy at lower price.

Then you sell.

The algos will front run you and end up selling lower into your buy at queue.

The same with when you decide to sell.

Thu, 08/09/2012 - 08:05 | 2690398 Zero Govt
Zero Govt's picture

it's nice to know that so much of our 'markets' (cough) are driven by braindead computers, that aren't paid to think but do (like Govt employees and the SS in fact)

if you bank at a British Bank and come into contact with their zombie 1-function only staff you'll realise how truly dumb the stock markets are

the NYSE and Nasdaq are to be complimented on their progress and modernisation.. 1 step forward, 2 million years backwards in human brain evolution

Welcome to the Era of Trading against Electronic Toilet Flush Mechanisms

Thu, 08/09/2012 - 08:19 | 2690426 Ralph Spoilsport
Ralph Spoilsport's picture

I have a lot more respect for the Toilet Flush Mechanisms.

 

Thu, 08/09/2012 - 08:27 | 2690433 Zero Govt
Zero Govt's picture

haha yes, it does something relatively productive 

don't expect any 'flush' designed by banksters to be productive.. in fact the algos are simple, illegal frontrunning (cheating) mechanisms

Thu, 08/09/2012 - 08:04 | 2690400 Meesohaawnee
Meesohaawnee's picture

morgue to restate? shocker. oh the horror.. that means more green today. the more corruption the more green. the more cover up needed.

Thu, 08/09/2012 - 08:12 | 2690401 Obadiah
Obadiah's picture

this is how they will re-hypothicate and vaporize all monies of the world  thanks for the heads up m'effers!

 

"The Devils a tricky motherfucker, brotha!"

-  Richard Pryor 1982  "That Niggas Crazy"

Thu, 08/09/2012 - 08:09 | 2690405 rtalcott
rtalcott's picture

Guess we were lucky to have someone sane like Curtis leMay with his finger on the red button in the 50's..

rt

Thu, 08/09/2012 - 08:14 | 2690415 Blopper
Blopper's picture

With the algos in control, the S&P 500 will NEVER collapse. Trust me, the Blopper.

Everyone holding cash by the sideline waiting for the collapse will lose out BIGGGGGGG cheese.

Thu, 08/09/2012 - 13:08 | 2691555 Panafrican Funk...
Panafrican Funktron Robot's picture

"BIGGGGGGG cheese"

Limburger, specifically.

Thu, 08/09/2012 - 08:15 | 2690416 jplains04
jplains04's picture

I can breathe a sigh of relief knowing we have Bernanke (FED), Geitner, the SEC/FINRA and perhaps Hank Paulson looking into these events....

Thu, 08/09/2012 - 08:35 | 2690463 Zero Govt
Zero Govt's picture

Yes another 'integrated (braindead) system' designed by banksters, a mechanism known as 'Asleep at the Wheel & Whitewash when you Awake' 

Thu, 08/09/2012 - 08:17 | 2690418 OldE_Ant
OldE_Ant's picture

Everything is fine. 

Go back to watching the Olympics and forget about it you ugly bags of water.

End of Line

Thu, 08/09/2012 - 08:40 | 2690482 Monedas
Monedas's picture

That's what Birkas are for .... shroud any sensuality ?

Thu, 08/09/2012 - 08:17 | 2690420 graymnzrc
graymnzrc's picture

What are the odds of a new exchange opening on no other principle than that they will not allow HFT.

Would going back to 1/8 pt bid intervals render the HFT unusable?

Thu, 08/09/2012 - 08:26 | 2690445 awakening
awakening's picture

'Would going back to 1/8 pt bid intervals render the HFT unusable?'

Nope, programmers would have to add an extra step to the HFT code so it can convert fractions to decimals for internal calcs then back to fractions for market orders (a few nanoseconds slower at the very most prior to hardware upgrades).

Thu, 08/09/2012 - 10:20 | 2690932 Nadaclue
Nadaclue's picture

How about adding a $0.01 transaction fee to every bid or offer placed, irregardless of fill. That would shut down not only the HFT's but the dark pools as well.

Thu, 08/09/2012 - 08:27 | 2690449 Equites
Equites's picture

Though going back to 1/8 pt bid intervals does not make sense today, the difference between a liquidity-providing market maker (which I actually benefit from as representing dumb money) and algo-trading is that the latter makes trading the point of having an exchange, rather than investing. The meaning of which goes way beyond semantics. 

Thu, 08/09/2012 - 08:21 | 2690431 Michelle
Michelle's picture

Cyberwarfare during the European holiday, only stocks go up, not down this year. Me thinks this just gets worse.

Thu, 08/09/2012 - 08:24 | 2690436 virgilcaine
virgilcaine's picture

Battle of the machines coming up. 

Thu, 08/09/2012 - 08:40 | 2690481 insanelysane
insanelysane's picture

I agree.  One of these days, 2 algos are going to collide.  I only wonder if they are built to stop at 0 or if they can trade in negative fiat units.

Thu, 08/09/2012 - 08:24 | 2690437 TrainWreck1
TrainWreck1's picture

No mulligans for algos.

Them who use them should be held PERSONALLY responsible for any losses incurred by same.

 

Thu, 08/09/2012 - 08:25 | 2690441 Equites
Equites's picture

The algo's are part of general societal deprivation - they reflect, better than anything else, the tremendous destruction of human capital that Wall Street as front for the top-financial sector has caused. 

 

Having so little to do with actual valuation of a company, with a company's ability to add economic value (which, apart for Exxon and GM, will only be the case when they add value to others in return), algo's represent the end of an American's middle class pension, the end of a European's pension that is constricted in insurance funds, and the end of credibility to anything this financial system at large represents. 

Thu, 08/09/2012 - 08:25 | 2690443 FiatFapper
FiatFapper's picture

The worry is when 'they' realise the need to obfuscate their intent, these spikes are too obvious.

The feedback loop must be easy to detect by an algo; perhaps some self-induced latency would be a good thing to see if an algo in Europe's dead market has validity and then a US algo can act accordingly.

Little but often (even more so), will be the new algo mantra.

Thu, 08/09/2012 - 08:29 | 2690453 chinaboy
chinaboy's picture

Guess the right question to ask is: who is next?

here is a piece of policy suggestion: turn off the computers and lock up the quant. Or go knight.

Thu, 08/09/2012 - 08:33 | 2690464 pragmatic hobo
pragmatic hobo's picture

if they turn off the computer the market will crash.

Thu, 08/09/2012 - 08:31 | 2690457 jjsilver
jjsilver's picture

Reuters is owned by rothschild

Thu, 08/09/2012 - 08:33 | 2690461 pragmatic hobo
pragmatic hobo's picture

I think the reuters is now owned by a canadian newspaper company.

Thu, 08/09/2012 - 08:44 | 2690501 Haager
Haager's picture

And that very newspaper company is owned by?

Thu, 08/09/2012 - 09:21 | 2690629 Money 4 Nothing
Money 4 Nothing's picture

The same people that rig the elections = Must read>> http://www.whoownsthenews.com/

Algo's gone wild in the Primary >> https://docs.google.com/file/d/0ByJAC-sfXwumZzI2bVlON2VTMnFyYVZZSnpDYnNy...

Thu, 08/09/2012 - 09:00 | 2690480 spanish inquisition
spanish inquisition's picture

My Tin Hat Conspiracy Alert!

1.20928 -So the algo shut down before 1.21. Just like it was programmed to?

Just got me wondering on how many other fx algos were/ are programmed to do the same thing (don't go above the peg) and how all these programmers got the same instructions. And that is my Tin Hat Conspiracy Theory for Thursday August 9th

Thu, 08/09/2012 - 08:43 | 2690497 Monedas
Monedas's picture

Do what you're told .... buy stocks, bonds .... short commodities .... Obama's got your back !

Thu, 08/09/2012 - 08:47 | 2690511 supafuckinmingster
supafuckinmingster's picture

the very small hippopotimus floatd in through the window and flumped because he got trampoline burn from a macdonalds corrot stick from a kiddie meal

Thu, 08/09/2012 - 08:53 | 2690533 Monedas
Monedas's picture

SSSS .... shit, shower, shave .... and get stoned !

Thu, 08/09/2012 - 08:47 | 2690512 Monedas
Monedas's picture

When the great reset is upon us .... job one for me is to show no outward signs of prosperity .... ostentatious poverty !

Thu, 08/09/2012 - 08:48 | 2690516 icanhasbailout
icanhasbailout's picture

If only we could get these algos to go long ZVZZT...

Thu, 08/09/2012 - 09:11 | 2690594 glock19
glock19's picture

If the Algos are this sensitive, couldn't some fatcat hedge fund manipulate this situation?

I mean I am not sure that I know how big of a fat finger it would take to drive down the stock market, but in the futures and ETF world...it seems one could "sacrifice" 10-20 million dollars on say volatility futures or currency pairs and hammer the crap of something to make trigger to hyperactive algos to sell off...and then step in at 5-10X the size and buy at the bottom of the algo driven sell off (or the other way around).

Is this really what is going on in the market continually...rinse and repeat?

Thu, 08/09/2012 - 09:12 | 2690600 Reptil
Reptil's picture

01101111 01101111 01101111 01101111 01101111 01101111 01101111 01101111 01101111 01101111 01101111 01101111 01101111 01101111 01101111 01101111 01101111 01101111 01101111 01101111 01101111 01110000 01110000 01110000 01110000 01110011 01110011 01110011 00100001 00100001 00100001

Thu, 08/09/2012 - 09:25 | 2690665 fuu
fuu's picture

Bad robot, bad.

Thu, 08/09/2012 - 09:36 | 2690719 Dareconomics
Dareconomics's picture

A currency trading algorithm at RBS started buying euros and selling swiss francs after the New York close. Then algorithms at RBS competitors noticed and started buying, too.  The net effect of all of these computers trying to frontrun each other during a slow time in the currency market was a temporary drop in the EUR/CHF of a half a cent.

It seems that the combined action of all of these machines is pro-cyclical. Momentum gathers quickly is whatever direction the first machine picks.

 

http://dareconomics.wordpress.com/

Thu, 08/09/2012 - 09:37 | 2690724 TheBird
TheBird's picture

Sorry, ignoring the small day trader with this. 

What was done in regards to stop orders left in the US that were triggered and filled?  So if I'm watching a 20 eur stop for a custy, how long am I waiting around before I fill it? I may, if they are good client (usually does not apply to another branch) perhaps 5 or even 10 pips.  But you as the trader cant dick around waiting to find out if its a fuck up or not.  And then when it is determined to be retardation, well then what?  I'm not going to unwind the fill on the stop but I can certainly understand why the client is going bonkers.

We used to have customers who would mark orders 'not valid' until Tokyo open to avoid getting fucked by the Aussies and Kiwis and take their chances on something really moving things.  We may now be at the point where nobody can safely leave stop orders at any time.

 

Thu, 08/09/2012 - 09:45 | 2690753 GMadScientist
GMadScientist's picture

Those stops are sitting ducks in HFT land and I feel sorry for your "custy".

 

Thu, 08/09/2012 - 13:30 | 2691608 Panafrican Funk...
Panafrican Funktron Robot's picture

Stops lol

What the fuck are you doing managing any kind of money in this environment.  Asshole.  

Thu, 08/09/2012 - 09:42 | 2690745 GMadScientist
GMadScientist's picture

instability, please meet the singularity.

Thu, 08/09/2012 - 10:34 | 2691007 FearLess_FLY
FearLess_FLY's picture

On one episode of Futurama,  the robot BENDER awoke and wandered into the kitchen to get a morning cup of coffee. Several people were in the kitchen.

"Oh, Oh,  I had a night mare.  I dreamed that I saw a 2", cried Bender.

 

01110011 0111120  0101010101010101010101010101

Thu, 08/09/2012 - 10:57 | 2691102 covert
Thu, 08/09/2012 - 12:01 | 2691352 calgal
calgal's picture

I can't decide which is my favorite meme for 2012.... "muppets" or "berserk algos"!

Thank you ZH for bringing a smile to my face every day...who knew that watching insane psycopaths flail around could be so entertaining!

Thu, 08/09/2012 - 18:12 | 2692363 FRBNYrCROOKS
FRBNYrCROOKS's picture

Easy to fix this mess. Tax the CANCELLED trades. Legitimate buyers and sellers won't be effected.

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