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Omega


Total Posts: 353
Joined: Jul 2006
 
Posted: 2012-08-02 09:43
Can anyone explain how knight lost money on yest trading?

Strandinator


Total Posts: 23
Joined: Sep 2010
 
Posted: 2012-08-02 10:53

ZH has a pretty good explanation.

http://www.zerohedge.com/news/what-happens-when-hft-algo-goes-totally-berserk-and-serves-knight-capital-bill


knocks_rocks


Total Posts: 161
Joined: May 2006
 
Posted: 2012-08-02 14:52
The error valued at $440MM of company money. KCG equity now under $3. Looks like they'll join LEH & BSC unless they can find equity pronto.

I would imagine risk management departments will be taking a close look at this error.

"...because money won is twice as sweet as money earned."

NIP247


Total Posts: 469
Joined: Feb 2005
 
Posted: 2012-08-02 15:01
why would they join LEH & BSC? what kind of leverage and exposure to mark to market of illiquid securities do they have? 30% down on an expected -150mUSD yday and another -40% on disclosure of 440mUSD final loss. It's a calculation that presumably is on closed positions of liquid instruments. It's done, it's there.

On your straddle, done on the puts, working the calls...

Steve Castle


Total Posts: 288
Joined: Sep 2010
 
Posted: 2012-08-02 15:37
A 440m will wipe out almost all cash equivalents reported as of 6/30.

Agree that their leverage is fine, but they need to generate some cash now. Maybe they should call J.G. Wentworth.

[edit]
well, this is calling my a liar:
7b in cash and short term

But if they really have 7b, why the "exploration of options"? 7b is more like total assets.
[edit]

in the words of one such quant ‘were on the whole either less quanted or not quanted at all’.

MrMagoo


Total Posts: 191
Joined: Jan 2008
 
Posted: 2012-08-02 16:13
NO advice is really needed @ pro level, but never underestimate extensive backtesting and simulated real-time trading under all possible conditions before putting real $$ to work.

That shouldnt happen within a well-capitalized, niche company.

"One who says it can't be done should not interrupt the person doing it."

NIP247


Total Posts: 469
Joined: Feb 2005
 
Posted: 2012-08-02 16:21
@MrMagoo, Knight CEO on cnbc saying it was a piece of code related to network "upgrade" and not trading/quant models...

On your straddle, done on the puts, working the calls...

Cheng


Total Posts: 2536
Joined: Feb 2005
 
Posted: 2012-08-02 16:22
But if they really have 7b, why the "exploration of options"? 7b is more like total assets.

According to Bbg indeed. As of YE 2011 they had 700mn long-term investments, and about 700mn other assets. Cash and short-term investments were good for 5.7bn.

However they have only 1.46bn equity... which gives a neat leverage.

"Inter deum et diabolum semper musica est"

MrMagoo


Total Posts: 191
Joined: Jan 2008
 
Posted: 2012-08-02 16:36
here´s knight's explanation

"One who says it can't be done should not interrupt the person doing it."

rod


Total Posts: 285
Joined: Nov 2006
 
Posted: 2012-08-02 17:39
> never underestimate extensive backtesting and simulated real-time trading under all possible conditions before putting real $$ to work.

Simulation can find some bugs, but it does not guarantee that all bugs will be found. Would it make sense to try to do Formal Verification of automated trading systems? If so, Computer Science departments will soon be asking GS and JPM for research funding.

redandtheblue


Total Posts: 328
Joined: Aug 2007
 
Posted: 2012-08-03 06:07
> never underestimate extensive backtesting and simulated real-time trading under all possible conditions before putting real $$ to work.

Problems will happen. The issue was that they had no time based checks for volume, pnl, positions etc.

lmog


Total Posts: 90
Joined: Mar 2010
 
Posted: 2012-08-03 07:44
Here is what I think is an interesting question. Is this the first time a single bug (or a single patch/rollout/release) bankrupted a relatively large company?

There are examples of infamous critical, expensive software (or logical hardware) failures for a number of organizations (Intel, NASA and Boeing come to mind). None seemed to have actually disbanded those (admittedly larger) organizations though...

harryb


Total Posts: 26
Joined: Jan 2007
 
Posted: 2012-08-03 12:00
In pictures:
http://www.nanex.net/aqck2/3522.html

mib


Total Posts: 347
Joined: Aug 2004
 
Posted: 2012-08-03 13:08

rod, they would need to verify the whole large "system", starting from OS kernels on their computers, exchange computers, and all communication hardware inbetween, not just the algo trading software.

if the glitch was indeed caused by a software update gone wrong, this is the second public 9-digit sum hit from a software update in a month (the previous one was RBS)

it is not clear to me how much zerohedge with nanex pictures really explain. Without attributing the individual trades to Knight, how can we tell that the pattern is unusual? Would not the trade oscillate as frequently between bid and offer in any market which is not moving in one direction? Or am I missing something in this explanation?

Edit: Actually, the bit I do not understand is why it took 45min to shut it off. I am sure they are monitoring the trading and P/L, so why could not they just stop taking orders and close the position after the first 5 or 10 min?

 


Head of Mortality Management, Capital Structure Demolition LLC

briant57


Total Posts: 95
Joined: Feb 2009
 
Posted: 2012-08-03 15:32
Has anyone heard what could/would happen to HotspotFX if Knight were to file for bankruptcy?

Steve Castle


Total Posts: 288
Joined: Sep 2010
 
Posted: 2012-08-03 15:47
Apparently they are now considering a '363' reorganization.

So I'm naive here, but if they have 5.7b in equities, options, etc...is it really that hard to sell 500m worth over a couple days to keep the lights on?

Isn't that the idea of that kind of asset? It's not like it's some obscure processing plant or acres of turnip farms.

Maybe they lost all their clients? If they can't take a <10% hit to assets, and they met their capital requirements, doesn't that mean capital requirements are a joke?

Am very curious to responses to straighten out my thinking here.

in the words of one such quant ‘were on the whole either less quanted or not quanted at all’.

KangaXX


Total Posts: 280
Joined: Mar 2005
 
Posted: 2012-08-04 00:19

Steve, its not the assets its the tangible capital which was only a small % of assets. Subtract the intangibles, goodwill, fixed assets, and the various line items that would be worth nothing to a financial counterpart/little in a wind up, then subtract the hit they took.


Bright, energetic people—usually quite young—have promised to perform miracles with “other people’s money” since time immemorial.

Steve Castle


Total Posts: 288
Joined: Sep 2010
 
Posted: 2012-08-04 21:09
Right, I'm an idiot, I was focusing on one line. They are were short as much as they are long at the time of the filing. Thanks.

in the words of one such quant ‘were on the whole either less quanted or not quanted at all’.

Luciender


Total Posts: 55
Joined: Aug 2008
 
Posted: 2012-08-04 21:33
I suppose Hotspot could easily be sold, its a separate unit from the rest of Knight and is profitable. FxAll sold for 625 mln not long ago - Hotspot could be worth a third of that, if ADV is anything to go by.

jungle
Chief Rhythm Officer
CSD LLC
Total Posts: 3162
Joined: Jul 2004
 
Posted: 2012-08-08 03:21
The Economist reveals all: "The swings [in equities], thought to be caused by an errant logarithm that emanated from Knight Capital..." Big Smile

[EDIT: from the print edition of 24-Aug]

athletico


Total Posts: 926
Joined: Jun 2004
 
Posted: 2012-08-08 06:19
Damn those logarithm wars...

goldorak


Total Posts: 442
Joined: Nov 2004
 
Posted: 2012-08-08 10:01
I would not worry. It looks like they follow an algorithmic growth.

If you are not living on the edge you are taking up too much space.

Scotty


Total Posts: 691
Joined: Jun 2004
 
Posted: 2012-08-09 07:40
Logarithms

“Whatever you do, or dream you can, begin it. Boldness has genius and power and magic in it.”

mib


Total Posts: 347
Joined: Aug 2004
 
Posted: 2012-08-09 10:19

ok, I get it now - an amazing link, Scotty

 

regarding knight, nanex have now a far fetched but relatively consistent version of what happened http://www.nanex.net/aqck2/3525.html


Head of Mortality Management, Capital Structure Demolition LLC

nikol


Total Posts: 356
Joined: Jun 2005
 
Posted: 2012-08-14 21:27

can it all be as an innovative way to transfer money from one entity to another one? :)

45 minutes of continuous loss looks like intentional... or stupid.

they could start real with low volume or in one stock only or something. it also looks like an over-confidence effect (we did it 1000 times before).

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