Software disaster zone Knight Capital bags $400m lifeline

Re: but what if...

Actually, it is relevant to the discussion. Say the company had made $440m, then we most likely wouldn't be having this disucssion as the news would be a small section on page 7 of the Financial Times. Yet the fact would still remain that they put a badly managed system into production and escaped by sheer good fortune!

What it serves to highlight is that win or lose, a mistake is still a mistake and given that the house usually wins, for every time you get lucky and benefit from a mistake, the house will win another nine times. So what this whole thing really proves is the need for solid configuration management and effective release processes that stop test applications getting released into production. Also the question has to be asked, if all this was done by a testing app, shouldn't that app have been making copious amounts of diagnostic output?

"It wouldn't have made $440 million and certainly not in an hour."

This a hundred times over, it's not some simple two way street that Knight went the wrong way on - there's no possibility the system could have made money as fast as it lost it.

The story has made news because of the impressive amount lost in such a small time because of bad IT practise.

If they had good IT practises they would have tested outside of a live environment, implemented the system and made small amounts of money over time.

Re: but what if...

It's designed to process lots of trades quickly, each one making a profit.

However, the $440M was only manifested in the time period concerned because the trades were unprofitable (and bloody stupid to boot).

Had the trades being made by the system been profitable for Knight Capital or their backers, the story would have a completely different tone but also a much smaller amount of money associated with it.

That story would also have featured a whole lot of traders initiating unscheduled brownware deposits in the rear baggage areas, as they suddenly saw a future in which they themselves were obsolete. But then again, you know what they say about things that sound too good to be true. :|

Re: but what if...

"Err, that's what it's designed to do. The whole point is to complete LOTS of trades at a very small profit each."

Velv,

No, that's not the point of the software. Knight are a market maker. That means their job is not to make money on the market - though they possibly do a small bit of that as I think they hold 'stock' (as it were) of some less frequently traded shares. What they do is aggregate trades for a bunch of clients, to make life easier, and cheaper. They then charge a small fee for each transaction.

So if customer a has 100 Apple shares it wants to sell, and customer Z wants to buy 90 of them, then Knight can handle both those trades, and may hold on to the spare 10 Apple shares to fulfill an order tomorrow. Or sell them on itself. Only on a rather bigger scale.

One of the advantages for their customers is that Knight will pay all the cash up front for a sale, rather than leaving shares on the market for people to buy in chunks, as they want them. So you just dump all the stock you don't want on Knight, and you've got the cash instantly to go shopping with.

So they don't make their cash from taking risks on investments, but by being useful.

Re: On the bright side...

Not sure whether it was their credit lines or not. They may have also been alerted by the exchange. Their trading had caused huge price and volume swings in some stocks and the NYSE traced it to Knight.

Re: And since it’s just a testing program, it didn’t keep track of any of its activity...

"So irrespective of the testing program not keeping logs, Knight were using the new RLP application to place trades on the NYSE and it is a regulatory requirement to maintain an audit trail of all transactions."

Err, no. As I understand it there is the RLP part which was supposed to be connected to the NYSE and comply with all its various rules. Then there is the testing package which is only meant to be used in the lab to load test the RLP (in the lab) to see if it is reacting correctly to the trades thrown at it and the transaction rate it is being hit with.

What happened is that the testing part was released into the wild with the RLP part and instead of just the RLP part connecting to the exchange, the testing module was now connected to the exchange also (rather than its lab setup of direct to RLP). This meant that the load generator started merrily firing off transactions and load testing but rather than being in an isolated environment with RLP it was on the actual exchange - somewhere it was never intended to connect to. Couple this with the fact it isn't supposed to log, track, or report trades as it is an artificial load generator not a trading system and you therefore have an issue with how many trades have been done. I'd imagine they would have to get some sort of report off of the exchange for trades requiring settlement and have to back out the ones the real system did correctly for clients to identify the rogue ones. When you look at how quickly these systems work it should come as no surprise as to how many transactions resulted and how much they lost - I believe NYSE has sub-millisecond trade speeds.

He also got the bailed out bit wrong as well.

Bailed out is what happens when governments throw a loads of money at a business or an industry with little or no hope of a return.

Knight has been loaned the $400m by other firms (no government involvement) and in return the other firms get dividends and the opportunity to convert the loans into shares. If you have ever taken part in a company share scheme then they usually offer you the opportunity to take shares or cash with interest after a minimum term. This is basically the same except they firms lending the money get the interest payments (dividends) from the start