Photo: Andy Wilson
High frequency trading might be making money faster than humanly possible, but it’s not perfect.After yesterday’s Knight Capital high-frequency trading disaster, the future of the algorithm based money making machine has been questioned.
And, it wasn’t Knight Capital’s first computer based mistake.
So, we’ve made a list of 10 of the biggest algorithm or technology based mistakes that have lost investors and tax payers millions over the last few years.
On February 3, 2010, Infinium Capital Management's high-frequency trading system caused a dollar spike in oil prices.
The algorithm used by Infinium was less than one day old and was used to complete 'lead/lag' trades of the US Oil Fund ETF.
The algorithm was turned on four minutes before the market closed, and uncontrollably began placing 2,000 to 3,000 oil futures orders per second. The algorithm was turned off five seconds later.
The firm lost $1.03 million in five seconds.
On May 6, 2010, stock prices fell for a terrifying 20 minutes.
European debt worries brought fear into the markets that day, and several computerized trading systems halted executions due to the markets volatility. The freeze in trading caused computers at other exchanges to read the freeze in trading as a rapid bidding down of stocks.
The Dow Jones Industrial Average was even down 998.5 points, erasing $862 billion. But, a few minutes after the crash, stocks regained about 600 points.
The CFTC blamed the mutual-fund company Waddell & Reed Financial for setting off the chain of events with its E-mini futures trades.
Following this fiasco, there have been circuit breakers installed that pause trading for over 1,300 securities when trading becomes volatile.
In March of 2011, cocoa-future prices on the Intercontinental Exchange dropped 13% in just seconds.
At around 10:30 a.m. on March 1, hundreds of sell orders for cocoa contracts hit the market at once. But, there were too few orders in the relatively tiny market to absorb the orders to sell.
The speed of the electronic trading platform was blamed for the $450 cocoa contract plunge to $,217/metric ton, because the tiny market is not nearly as liquid as other electronically traded markets.
The trades occurred at 5 p.m. in New York, at a time of the day when few traders were around to monitor the situation and there was wide spread panic in Tokyo due to the nation's recent disaster.
A surge of orders hit the market at all once, and with forced buying linked to options, orders were let loose to be completed by algorithmic and high-frequency trading programs.
The dollar tanked 5% against the Yen in minutes.
On March 31, 2011, 10 of Morningstar's 15 new FocusShares ETFs experienced a 'flash crash'.
Within the first 30 minutes of trading, the 10 ETFs lost anywhere from 25% to nearly 100% of their value.
Market maker Knight Capital was blamed for the error, admitting that they experienced a processor error in their computerized trading platform.
One of the ETFs opened that morning at $25.32 and fell as low as $.60 per share. However, all trades outside of 10% of the opening price were canceled.
The 10 ETFs traded normally once the problem was resolved.
On November 10, 2011, the rating agency, S&P, posted on its website that it had downgraded France's AAA, causing a massive sell off in government debt.
From the news, French 10-year bond yields spiked up nearly 9%.
The S&P quickly retracted their downgrade statement, and blamed the false downgrade message on a major technical error.
On March 23, 2012, BATS Global Markets, a stock exchange based in Kansas, went public on the Nasdaq.
A software bug in BATS' codes that deal with auctions of stocks following their IPO was to blame. The software was not able to follow the stock's continuous trading as it moved from auction to trading. Also, a unique combination of order types caused some problems.
This issue led to a 'failure status' in the software that matches customers' orders to the national market's trading system, freezing markets.
BATS' software glitch was also to blame for Apple shares plunging nearly 10% that day.
BATS decided to withdraw their IPO after shares plunged from $16 to $.04 per share.
On May 18, 2012, in the biggest IPO in internet history, Facebook shares were listed on the Nasdaq.
But, there was a problem that delayed the initial trades of Facebook shares for about a half hour.
Officials at the Nasdaq thought that they had fixed the glitch that caused the delay, but more issues with trading followed.
For the first two and a half hours of trading, almost all traders were unable to verify the results of their FaceBook trades.
Even with all of the trading glitches, Facebook's IPO still set the record for the volume of shares traded in one day.
On the morning of August 1, 2012, about 150 stocks experience an unknown surge in market volume.
Market-maker and broker, Knight Capital Group, was responsible for the mess and blamed the volatility on issues with its algorithms used in its high-frequency trading platform.
Later that afternoon, officials decided that all trades executed 30% above or below that day's opening price would be canceled.