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Abstract
When a rogue algorithm racked up $440 million in losses for Knight Capital on August 1, other firms involved in automated trading looked in the mirror. Knight Capital probably thought the same. The firm was no algorithmic novice, nor was it trading complex products at an obscure venue -- its losses were incurred in securities listed on the New York Stock Exchange after new trading software caused it to bombard the market with unintended buy orders. Exiting those positions resulted in the trading loss. The event has prompted the US Securities and Exchange Commission (SEC) to announce a September 14 round-table discussion to look at ways of protecting highly automated markets from algorithms that run amok. In the cash markets, regulators are already worried about algorithms and high-frequency trading. Besides the SEC's round-table initiative, authorities in Europe, India, Hong Kong and Singapore are investigating, setting out guidelines or introducing controls on automated trading.