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Anorak | How to lose $440 million in an hour – Knight Capital advise

How to lose $440 million in an hour – Knight Capital advise

by | 8th, August 2012

THE American company, Knight Capital, managed to lose $440 million in an hour last week on the New York Stock Exchange. Even bankers aren’t normally that stupid so what in buggery happened?

Real, outright, total, stupidity happened.

They believe that Knight was testing to make sure that a new market maker software package (Retail Liquidity Provider – RLP) would integrate with the NYSE live trading system.

In addition to the RLP code, there’s a testing routine that fires off buy and sell orders at RLP in order to ensure that it properly records all of the trades. It’s like a load generator for a commercial application, and it’s used in an isolated lab to simulate live trading.

It looks like that package was mistakenly included in the RLP deployment package, and the whole thing was fired up on Wednesday morning and linked to the NYSE live system.

So, there’s a test system that allows you to play with the system so you understand it before you use it in earnest. And they, umm, let that test system loose on the real markets. A bit like linking up a few real armoured divisions to Call of Duty. Probably going to be wonderful fun but not of all that much use to anyone.

Of course this has led to all of the usual suspects demanding that there must be much more regulation of the financial markets. I’m really not quite sure why though. No regulator would ever write a law that said “do not link your test software to the real markets” because they would not believe that anyone would ever be stupid enough to do so. Such a warning would be like placing a sticker on a car battery saying “do not discharge through your testicles”.

The thing being that yes, real world people can be even more stupid than even regulators think they could be: I’m sure there’s a redneck somewhere who would have been glad of such a battery warning. If he could read.

The other thing being that of course, now they’ve seen it done, no one’s going to be stupid enough to ever do it again so a regulation would be supurfluous now anyway.



Posted: 8th, August 2012 | In: Money Comment (1) | Follow the Comments on our RSS feed: RSS 2.0 | TrackBack | Permalink