Machines are now in charge of Wall Street
Frankenstein Takes Over the Market
By JOE NOCERA, NYT
This week, yet another Wall Street firm most people have never heard of, relying on a computerized trading program that they can’t possibly understand, shook investors’ faith in the market. This is happening a little too frequently, don’t you think?
The company, of course, was Knight Capital, a major market maker that generated an astonishing 11 percent of all the trades in the first half of this year, according to the Tabb Group. It caters to sophisticated Wall Street traders as well as small investors, whose brokers often used Knight to fulfill their trades.
Trying to stay a step ahead of its competitors, Knight rolled out some new trading software. The software wasn’t ready. Instead of fulfilling customers’ orders, Knight’s computers went on an out-of-control spree of rapid-fire buying and selling. As trading volumes swelled, the Wall Street guys jumped in. (Sophisticated traders, relying on their own rapid-fire computers, often love volatility because it leads to trading anomalies they can take advantage of.) Many retail customers, having no idea what was going on, wound up losing money. I know: shocker.
The mishap also cost Knight so much money that its future is in jeopardy. Even putting aside the havoc wreaked on customers, you’d think that self-preservation would have been enough for Knight to want to ensure that its software worked. But apparently not. Wall Street is now as blindly reliant on computers, on algorithms, on high-frequency trading, as it was once blindly reliant on the risk models that allowed “toxic bonds” to be rated Triple A. Wall Street has created its own Frankenstein. The machines are now in charge.
(More here.)
This week, yet another Wall Street firm most people have never heard of, relying on a computerized trading program that they can’t possibly understand, shook investors’ faith in the market. This is happening a little too frequently, don’t you think?
The company, of course, was Knight Capital, a major market maker that generated an astonishing 11 percent of all the trades in the first half of this year, according to the Tabb Group. It caters to sophisticated Wall Street traders as well as small investors, whose brokers often used Knight to fulfill their trades.
Trying to stay a step ahead of its competitors, Knight rolled out some new trading software. The software wasn’t ready. Instead of fulfilling customers’ orders, Knight’s computers went on an out-of-control spree of rapid-fire buying and selling. As trading volumes swelled, the Wall Street guys jumped in. (Sophisticated traders, relying on their own rapid-fire computers, often love volatility because it leads to trading anomalies they can take advantage of.) Many retail customers, having no idea what was going on, wound up losing money. I know: shocker.
The mishap also cost Knight so much money that its future is in jeopardy. Even putting aside the havoc wreaked on customers, you’d think that self-preservation would have been enough for Knight to want to ensure that its software worked. But apparently not. Wall Street is now as blindly reliant on computers, on algorithms, on high-frequency trading, as it was once blindly reliant on the risk models that allowed “toxic bonds” to be rated Triple A. Wall Street has created its own Frankenstein. The machines are now in charge.
(More here.)
Powered by Blogger
0 Comments:
Post a Comment
<< Home