A Bloomberg News story yesterday shed a bit more insight into what caused the uncontrolled electronic trading by the market making brokerage Knight Capital a few weeks ago.
..a dormant legacy program was somehow “inadvertently reactivated”, and then interfered with (or took over?) the firm’s trading on 1 August, when a new software trading program Knight had installed began operation.
“Once triggered on Aug. 1, the dormant system started multiplying stock trades by one thousand,” Bloomberg was told by two unnamed sources who were briefed on the matter.
…“Knight’s staff looked through eight sets of software before determining what happened.”
…Unfortunately, the article doesn’t say anything more about how the dormant software awakened and interposed itself when it came to executing trades that were supposed to be initiated by the new software Knight had installed. It also doesn’t say why Knight would keep “eight sets of software” apparently resident in its execution environment.
We’ll probably have to wait until the SEC finishes its investigation to find out what actually happened as well as, presumably, some juicy details about Knight’s software development and system testing practices.
Nevertheless, the so-called “Knight-mare glitch” (among others) has spurred regulators in Asia and Australia to “clamp down” on high frequency trading firms, the Financial Times reported this week. The regulators are “unveiling sweeping proposals that would require traders to have controls on their systems and test them annually to prevent market disruption,” the paper said. Regulators want “pre-trade” risk controls in place to keep “aberrant” trading from happening, as well as trading “kill switches” when the risk controls fail.