December 01, 2011

Business software provider Progress Software is making a number of dire forecasts for 2012, including a prediction that a rogue algorithm will cost some financial institution at least $1 billion, and that an "Occupy High-Frequency Trading" movement will commence.

Progress said it expects an algorithm somewhere to go into an infinite loop, taking on an un-hedged and irreversible position that some firm will be powerless to shut down, causing unprecedented damage.

"Although financial institutions have tightened risk processes to prevent human fraud, particularly after the UBS scandal this year, they are still not adequately monitoring algorithmic trading," Progress Software Chief Technology Officer John Bates said in a statement. "All it takes is one rogue algo to go into an infinite loop and the results could be disastrous."

In 2012, regulators, the government and the public will team up to start the "Occupy HFT" movement in a bid to challenge firms who profit from rapid-fire trading strategies, the firm said. High-frequency trading has become a controversial topic in the aftermath of the 2010 flash crash, and Progress Software said it expects overzealous regulations to handicap the lucrative industry.

"Because financial services firms are not proactive in managing risk and preventing issues such as fat finger errors and flash crashes, regulators will go too far and try to strangle HFT," Bates said.

The firm also issued a warning about over-the-counter derivatives trading, which is slated to be moved onto swap execution facilities next year under the Dodd-Frank bill. Progress Software said that the electronic trade of OTC swaps will raise the risk of a cross-asset "splash crash" that will befuddle regulators who don't really understand that market.

But even as western marketplaces struggle under new regulations, emerging markets stand to gain the most, with a surge of "regulatory arbitrage" benefitting lightly regulated places like China and Russia. Meanwhile, regulated investment firms in Brazil, Russia, India and China (BRIC) will continue to develop smart order routing capabilities as they gear up for surge in algorithmic trading that'll be driven in part by Volcker Rule "escapees," Progress Software predicted.

As the Senior Editor of Advanced Trading, Justin Grant plays a key role in steering the magazine's coverage of the latest issues affecting the buy-side trading community. Since joining Advanced ...