05 Aug Algorithmic Trading Systems – Not Child’s Play
Late one NITE, a line of errant code…
Algorithmic Trading Systems can give the impression of being simple enough for the E-Trade babies to use. Nothing could be further from the truth. Take this weekend, Knight executives will work into the night securing the liquidity necessary to remain in business.
Clients such as TD Ameritrade have said they will return to routing orders to Knight. The frenzy and angst of the other day is now muted. As of this writing, a group of six lenders (TD Ameritrade and GetGo amongst them) are working on final terms. Citadel and KKR have left the discussions deciding not to participate in the loan package. It looks like Knight will secure financing and live to trade another day. As any trader who’s been in the market for a minute knows, that’s the penultimate goal – staying in business.
There’s an old trading adage that goes something like this:
“There’s a pond out in back of my house and I’ll bet in 1000 years that pond is going to dry up. But that doesn’t mean I can’t drown in the middle in the meantime.”
Contrasting NITE with Larcenous Chicanery
As the dust settles, I find myself contrasting the events at NITE to the events at MF, PFG, or JPM. Whereas those events included players who proactively and willfully acted in a reckless, illegal fashion, this guy at NITE appears to have been a hardworking wonk whose fingers got burned by a line (or ten thousand) of code.
Error or Chicanery – They Both Cost Money & Erode Confidence
It’s clear that both types of action cost people money and erode investor confidence. In our desire to remove the “human” side of making trading decisions, it appears we’ve fallen afoul of a different type of human foible. Human error. It’s been a while since we first coupled a rules-based trading system with an algo to execute those orders. The systems have gotten better and faster. Latency is measured in nanoseconds. It all looks so damn easy… But it’s still not child’s play.
The Short List of Intelligent Folks Who Had Opinions of Their Own
A lot of people had intelligent things to say about Knight. Here are two of my favorites:
- Nathaniel Popper and Peter Eavis do a great job of explaining the risks of Algo trading, as well as putting Knight into context, in their NYT piece “Errant Trades Reveal a Risk Few Expected”
- Stephanie Ruhle and Whitney Kisling bring us up to date on Knight’s recent financial engagement in their article in Bloomberg Businessweek.