Thursday, August 2, 2012

Wall Street Shits Itself (Yes, again)

In an all too familiar throw-back to the 2007/2008 era, the Wall Street scandals and fiascos keep mounting day after day.  This time it was Knight Capital one of the High Frequency Trading (HFT) Firms on Wall Street.  Yesterday, inexplicably, one of their computer algorithms went rogue and started trading dozens of stocks erratically.  In the event, the trades had to be cancelled and reversed causing Knight to incur a one day loss of $440 million.  This type of scenario is exactly what the book Broken Markets predicted would happen on an increasingly frequent basis due to the out-of-control complexity of the HFT algorithms.  It's at least the 3rd major glitch this year alone, along with an unknown number of lesser (aka. single stock) events that appear to be happening on a regular basis now.

The truly scary aspect of this story is that this glitch happened on a day when overall trading volumes were extremely light (summer volume).  Imagine what could happen during a major asset reallocation if for example the Central Banks don't give the markets their latest dose of monetary heroin?

At that point, anything is possible...