Experts say 2012 is the year trading algorithms made the market too complex

Experts say 2012 is the year trading algorithms made the market too complex

on Dec 28, 12 • by Chris Bubinas • with No Comments

Reports of software flaws causing trading problems became commonplace in 2012, making it difficult to pinpoint the most notable error, according to a recent Financial News column...

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Reports of software flaws causing trading problems became commonplace in 2012, making it difficult to pinpoint the most notable error, according to a recent Financial News column. Writers Michelle Price and Tom Osborn noted a rise in the number of arguments that software-driven events such as Knight Capital’s loss of $461 million in 45 minutes and glitches during the IPOs of companies such as Facebook are evidence that the U.S. markets have become too complicated due to the proliferation of high-frequency trading algorithms.

“We can’t go 60 or 90 days without a major fiasco, which shows that the market has become too complex, even for institutions,” Duncan Niederauer, chief executive of exchange operator NYSE Euronext, said, according to Financial News.

The publication noted that the U.S. markets have become so complex that they are a challenge to regulate. While some firms have argued that the markets are more efficient and competitive than ever before, others worry that there may be a need for more controls. Several onlookers have praised the risk management steps being taken by the exchanges themselves, such as Bats Global’s launch of a kill switch that can halt trading in the event of aberrant market behavior.

“Despite the problems we have seen this year, the irony is that behind the scenes we have also seen some great improvements in terms of how stock exchanges are cleaning up their act, especially with respect to order types,” Sal Arnuk, co-founder of US brokerage Themis Trading, said, according to Financial News.

By strengthening the safeguards in the software underlying high-frequency trades, markets may be able to mitigate some of the risks. Using tools such as static analysis software, developers may be able to catch algorithmic errors before they wreak havoc on trading, while processes such as code refactoring can help simplify programs, giving traders a better grasp on what trading algorithms are actually doing. Such approaches can provide internal controls to manage what is increasingly seen as an unmanageable market.

“The problem with [high-frequency trading] isn’t that we know it’s dangerous, it’s that we don’t know anything at all,” wrote Mother Jones’ Kevin Drum. “It’s become flatly too complex for even its creators to understand what their creations are doing.”

To handle these critiques and industry reservations about the practice, high-frequency trading processes may need to be re-examined and reworked, one expert told Financial News, noting that so far measures to maintain oversight of high-frequency trading have been “piecemeal enhancements.”

Software news brought to you by Klocwork Inc., dedicated to helping software developers create better code with every keystroke.

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