Canceling Erroneous Trades: You’re Asking The Wrong Questions

The topic of canceling erroneous trades is not a new one on the pages of this blog.   I’ve written about the topic on more than one occasion, most recently with respect to the Knight Capital Group error last year.   The relevant story from yesterday is that Goldman Sachs ($GS: no positions) had an error with their options trading code.   Bloomberg explains:

“A programming error caused the firm to send unintentional stock options orders in the first minutes of trading, pushing prices on dozens of contracts to a dollar each, according to a person briefed on the matter yesterday and data compiled by Bloomberg.”

The article continues, emphasis mine:

“Any losses for Goldman Sachs, the fifth-largest U.S. bank by assets, won’t be known until exchanges determine which contracts should be canceled, said the person, who requested anonymity because the information is private.”

Can you feel my BAJUNGI TILT boiling?   This is friggin’ ridiculous.   The right question to ask is not “which contracts should be canceled?”   The right question to ask is “Why do you think that market professionals who screw up should be let off the hook?”  or perhaps “WHY should any contracts be canceled at all?”

Goldman Sachs is not some Mom & Pop retail schmuck.   They are professionals.   Many would consider them to be amongst the smartest of The Smart when it comes to trading on Wall Street.  They should know better.   If Goldman Sachs is rushing their code into production without checking it carefully enough, they should be responsible for the outcome.   If Goldman Sachs is writing code that sends out bad orders, they should be responsible for the outcome.

I have been and continue to be a defender of the right of programmers to take advantage of their abilities to trade quickly.  I’m not afraid of high frequency trading and I don’t think it should be banned.    But if you’re going to allow automated trading – high frequency or not – you have to allow the natural consequences of that trading.  That means that when the code screws up – and make no mistake: what that means is that the people who WROTE the code screwed up – there are consequences.  You don’t get a mulligan.  You don’t get a do-over.  You don’t get to erase all of the money losing trades that came as a result of your screw-up.

Here’s one more gem from the article:

““To bust a trade in equities it’s relatively straightforward, to bust a trade in options it would take more time,” Howard Tai, a Kansas City, Missouri-based analyst with Aite Group LLC, said in an interview. “You need to look at each one of the factors and then run through a sanity check, and say, ‘Beyond the cash equity price at the time it happened, how did everything else affect it?’”

Oh wait – I have an easy solution to how to solve this problem: Don’t bust the trades!   Eureka!  This also solves the problem of all of the traders (counterparties to Goldman’s error) who are trying to manage their position risk who still, 24 hours later, don’t know if their trades are going to be canceled.

As long as the regulators and exchanges insist on sabotaging the integrity of their own markets by letting firms who commit errors off the hook, the critics of modern market structure will be right to complain.   Why should we expect the writers-of-the-code to work to ensure that they don’t screw up if they’re not held accountable when they do screw up?

EDIT: Thursday 8/22 around noon:

I’m being told by options trading colleagues in Chicago that the CBOE saw many of these erroneous GS orders queuing up 45 minutes before the market opened and notified Goldman Sachs.   I have no hard evidence that verifies this claim – but I’m also told that CBOE officials were seen congregating at the Goldman booth before the open.   Does that change anyone’s point of view on this?   For me, that would solidify the “they have to be held responsible” view.   Furthermore, if you can’t fix your system in 45 minutes, you shouldn’t be allowed to trade.  If you can’t cancel bad orders, you shouldn’t be allowed to trade…

Bloomberg:  Goldman Options Error Shows Peril Persists One Year After Knight

Kid Dynamite: HFT category

Dear NYSE: Canceling Trades Destroys The Integrity of The Market

Algos Gone Wild: Stupid Computers Are Good for Smart People


disclosure: no positions in $GS or $KCG

Kid Dynamite is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to If you click on my links and buy anything, even something other than the product advertised, I earn a small commission, yet you don't pay any extra. Thank you for your support.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

blog comments powered by Disqus
Kiddynamitesworld Blog