Stephen Foley: The disasters that show why we have to be on our guard with algos

US Outlook Si ves algo, di algo. If you see something, say something. It's written in all the subway cars here in New York City, a reminder we mustn't ignore suspicious packages or suspicious passengers. And as we trundled towards Wall Street station on Wednesday, I couldn't but think of it as a warning to stock-market investors, too. Si ves algo, di "algo".

Wednesday was when another computer algorithm, or algo for short, went haywire and caused chaos across the equity market.

This time the only thing that got blown up was Knight Capital. That's the name of the trading house whose faulty computer code caused a surge in orders on the New York Stock Exchange, loading the firm up with unwanted shares which it then had to dump at a loss – a $440m (£283m) loss – almost certainly ending its days as an independent player in the markets.

The rest of us had a lucky escape. This is not always the case. When the Nasdaq stock market introduced a new computer system in May to manage the opening trades of a newly floated share, it worked so badly and caused so much confusion that investors didn't know whether their orders had gone through and they pulled back from the market entirely.

You might recall that debacle: it was the flotation of Facebook. UBS alone claims to have lost Sfr349m (£229m). The broker says it put in multiple orders by accident and ended up owning large numbers of Facebook shares its clients did not need.

The list goes on. When Bats Global Markets, which operates the third-largest equity market in the US, tried to float its own shares, its computer system failed, affecting trading in every stock in the alphabet before Bats. Investors around the world saw Apple shares plunge 10 per cent in a matter of seconds. That's three high-profile disasters in little more than four months, and then there's the "flash crash" of May 2010 when, thanks to a chain of algorithmic consequences, the butterfly-wing flap of a single unusual order in the futures markets caused the hurricane of a 9 per cent fall in the Dow Jones Industrial Average within minutes.

The rise of high-speed, computerised trading has been encouraged by regulators for the past decade, since on balance it adds liquidity to markets, cuts trading costs and reduces the scope for intermediaries to gouge retail investors. But we can be under no illusions now that with complexity comes the risk of dangerous error, perhaps even of system-wide collapse.

The best we can hope for is that the situation will correct itself. The Knight's tale is a cautionary one: sloppy coding or careless testing procedures can endanger your firm. Better hire better software engineers. Regulators need to make sure they, too, hire people with the technical skills to supervise modern trading firms, and they need to consider new rules, too. Ensuring a firm has proper procedures to test new computer code is every bit as important as ensuring it has compliance procedures to prevent conflicts of interest and insider trading.

Retail investors can no more give up using the stock market than they could stop using the subway, but maybe they will now proceed more warily. As the recorded announcer said as we pulled into Wall Street, "Remain alert, and have a safe day."

Life and Style
life
News
Brad Pitt and Angelina Jolie reportedly married in secret on Saturday
peopleSpokesperson for couple confirms they tied the knot on Saturday after almost a decade together
Life and Style
Chen Mao recovers in BK Hospital, Seoul
health
News
Joan Rivers has reportedly been hospitalised after she stopped breathing during surgery
people81-year-old 'stopped breathing' during vocal chord surgery
PROMOTED VIDEO
News
ebooksAn evocation of the conflict through the eyes of those who lived through it
Arts and Entertainment
tv
News
i100
Arts and Entertainment
Diana from the Great British Bake Off 2014
tvProducers confirm contestant left because of illness
Arts and Entertainment
Lisa Kudrow, Courtney Cox and Jennifer Anniston reunite for a mini Friends sketch on Jimmy Kimmel Live
tv
Life and Style
fashion

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Client-Side web developer (JQuery, Javascript, UI, JMX, FIX)

Negotiable: Harrington Starr: Client-Side web developer (JQuery, Javascript, U...

Structured Finance

Highly Competitive Salary: Austen Lloyd: CITY - An excellent new instruction w...

SQL Server Developer

£500 per day: Harrington Starr: SQL Server Developer SQL, PHP, C#, Real Time,...

C#.NET Developer

£600 per day: Harrington Starr: C#.NET Developer C#, Win Forms, WPF, WCF, MVVM...

Day In a Page

Ukraine crisis: The phoney war is over as Russian troops and armour pour across the border

The phoney war is over

Russian troops and armour pour into Ukraine
Potatoes could be off the menu as crop pests threaten UK

Potatoes could be off the menu as crop pests threaten UK

The world’s entire food system is under attack - and Britain is most at risk, according to a new study
Gangnam smile: why the Chinese are flocking to South Korea to buy a new face

Gangnam smile: why the Chinese are flocking to South Korea to buy a new face

Seoul's plastic surgery industry is booming thanks to the popularity of the K-Pop look
From Mozart to Orson Welles: Creative geniuses who peaked too soon

Creative geniuses who peaked too soon

After the death of Sandy Wilson, 90, who wrote his only hit musical in his twenties, John Walsh wonders what it's like to peak too soon and go on to live a life more ordinary
Caught in the crossfire of a cyber Cold War

Caught in the crossfire of a cyber Cold War

Fears are mounting that Vladimir Putin has instructed hackers to target banks like JP Morgan
Salomé's feminine wiles have inspired writers, painters and musicians for 2,000 years

Salomé: A head for seduction

Salomé's feminine wiles have inspired writers, painters and musicians for 2,000 years. Now audiences can meet the Biblical femme fatale in two new stage and screen projects
From Bram Stoker to Stanley Kubrick, the British Library's latest exhibition celebrates all things Gothic

British Library celebrates all things Gothic

Forthcoming exhibition Terror and Wonder: The Gothic Imagination will be the UK's largest ever celebration of Gothic literature
The Hard Rock Café's owners are embroiled in a bitter legal dispute - but is the restaurant chain worth fighting for?

Is the Hard Rock Café worth fighting for?

The restaurant chain's owners are currently embroiled in a bitter legal dispute
Caribbean cuisine is becoming increasingly popular in the UK ... and there's more to it than jerk chicken at carnival

In search of Caribbean soul food

Caribbean cuisine is becoming increasingly popular in the UK ... and there's more to it than jerk chicken at carnival
11 best face powders

11 best face powders

Sweep away shiny skin with our pick of the best pressed and loose powder bases
England vs Norway: Roy Hodgson's hands tied by exploding top flight

Roy Hodgson's hands tied by exploding top flight

Lack of Englishmen at leading Premier League clubs leaves manager hamstrung
Angel Di Maria and Cristiano Ronaldo: A tale of two Manchester United No 7s

Di Maria and Ronaldo: A tale of two Manchester United No 7s

They both inherited the iconic shirt at Old Trafford, but the £59.7m new boy is joining a club in a very different state
Israel-Gaza conflict: No victory for Israel despite weeks of death and devastation

Robert Fisk: No victory for Israel despite weeks of devastation

Palestinians have won: they are still in Gaza, and Hamas is still there
Mary Beard writes character reference for Twitter troll who called her a 'slut'

Unlikely friends: Mary Beard and the troll who called her a ‘filthy old slut’

The Cambridge University classicist even wrote the student a character reference
America’s new apartheid: Prosperous white districts are choosing to break away from black cities and go it alone

America’s new apartheid

Prosperous white districts are choosing to break away from black cities and go it alone