Saturday, August 4, 2012

Tilting at Algorithmic Windmills

   The hand-wringing and angst expressed in the media over Knight Capital's $440m rogue algorithm is fascinating. Knight Capital, once known as Roundtable Partners and Trimark, is the virtual Don Quixote of algorithmic trading. I have been to its HQ in Jersey City, NJ and spent some time on the trading floor; the atmosphere is pure testosterone. (And the technology mavens are salesmen-on-speed.)
   The damage done by Knight on August 1st was two-fold. The algorithm, buying when it should sell and selling when it should buy, almost cost the brokerage its firm. And it pointed out to an already gun-shy general public that machines are running the stock markets - often badly.
   I believe that the uproar is unwarranted, but it may force high frequency and algorithmic trading firms to take stress-testing of algos and trading systems more seriously. Especially after NASDAQ's lack of thoroughness in testing a new program led to the Facebook IPO debacle.
   Yesterday I heard someone call for the institution of a new position in trading firms - systems risk manager. The SRM would monitor high-speed electronic trading systems for glitches and fat fingers and fraud, reporting to the heads of risk and compliance. I think that is inspired. For years I have been writing about and supporting real-time monitoring and surveillance of trading systems and exchanges using technology, but it never occurred to me that there should be a specific official in every firm. It will create new jobs on Wall Street and in the City of London, while satisfying regulators and investors. I feel a new campaign coming on...

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