Trading Technology

10:50 AM
Phil Albinus
Phil Albinus
Commentary
Connect Directly
Twitter
RSS
E-Mail
50%
50%

How to Save a Wounded Market from Rogue Algos

You couldn't ask for a better example in the Knight Capital debacle of how quickly today's fast markets can claim a victim. Will this be the last of the rogue algorithms to hit the markets?

When an investment firm deploys a new trading algorithm, you can almost hear Russell Crowe's cry from "Gladiator": "At my signal, unleash hell." But instead of slaves overtaking their armor-clad Roman oppressors in a bloody uprising, Knight Capital unleashed another type of unholy mess late this summer. Within the space of an hour, the market maker's new and reportedly untested algorithm went rogue and started making a series of baffling and seemingly unstoppable trades. By the next day, the beaten Knight Capital was looking for suitors to save it from the $400-million damage it created.


With automated trading accounting for as many as three out of every four trades on Wall Street, a crash brought on by a rogue algorithm was perhaps inevitable. Following the Knight Capital disaster, Advanced Trading's October digital issue examines the question that every buy-side trader should be asking: Are broker algorithms a ticking time bomb?

You couldn't ask for a better example of how quickly today's fast markets can claim a victim. Knight Capital was a well-respected firm. The fact that other companies quickly came to its rescue not only shows that the firm is a prized asset (obviously, this was one hell of a business opportunity), it also suggests that the company had a smart team with respected people at the helm. Think back to 2008, when Lehman Brothers collapsed: No one rushed to the barricades to support CEO Dick Fuld in his time of need.

[Who Owns The Risk If A Third-Party Algo Goes Rogue?]

Here at Advanced Trading, we examined the fallout of Knight Capital's rogue algo. Senior editor Justin Grant looks at how the buy side is responding to the market maker's near implosion, while buy-side veterans discuss the question that everyone should be asking: Can you ever trust third-party algos again? If things for a company as bright and risk-averse as Knight Capital can go this badly, who's to say that the next sell-side or broker-dealer algorithm won't go rogue as well?W

It may be fall, but things are heating up in the States, to say the least. The presidential election next month will decide the leader of the proverbial "free world," but perhaps more important, the steward of the nation's economy and the regulator-in-chief of Wall Street. Let's hope we have seen the last of these bloody algorithms unleashed on the already wounded markets.

Phil Albinus is the former editor-in-chief of Advanced Trading. He has nearly two decades of journalism experience and has been covering financial technology and regulation for nine years. Before joining Advanced Trading, he served as editor of Waters, a monthly trade journal ... View Full Bio
Comment  | 
Print  | 
More Insights
More Commentary
5 Tips On How To Prepare For A Data Breach
If you are a financial institution your cyber security defenses will be breached -- again and again. Here are five tips to respond quickly and minimize damage.
Wall Street CIOs Have a Vendor Management Problem
If Wall Street CIOs want to stay ahead of competition and ensure high-speed trading software doesn't start the next flash crash, they need better insight into vendor delivered software.
Technology Innovation Returns to Financial Services
Capital Markets Outlook 2015: Following a few years dominated by regulatory compliance and cost saving technology initiatives, financial organizations are finally investing in innovative technology and tools.
Voice Biometrics Improve Transaction Monitoring Fraud Detection
Why voice biometrics should be a part of your fraud prevention strategy in the call center.
Fintech Fast Forward 2015
What will shape the future of Fintech in 2015 and beyond?
Register for Wall Street & Technology Newsletters
White Papers
Current Issue
Wall Street & Technology - Elite 8, October 2014
The in-depth profiles of this year's Elite 8 honorees focus on leadership, talent recruitment, big data, analytics, mobile, and more.
Video
Exclusive: Inside the GETCO Execution Services Trading Floor
Exclusive: Inside the GETCO Execution Services Trading Floor
Advanced Trading takes you on an exclusive tour of the New York trading floor of GETCO Execution Services, the solutions arm of GETCO.