BETTER TESTING
Outsiders questioned why Knight did not pre-test the new software more assiduously, and why the bad trades continued to be generated for more than half an hour, instead of being shut down by internal systems almost immediately.
New York quantitative hedge fund owner Roy Niederhoffer said that there was "no excuse" for Knight failing to act sooner.
"This is like a nuclear reactor or aircraft," said Niederhoffer, whose R.G. Niederhoffer Capital Management uses Knight. "There has to be some way of seeing the state of the whole system."
Trading system glitches often arise with the installation of new systems or computer code. But experts said that market participants constantly need new systems to accommodate new rules and changing customer demands - particularly from high-frequency traders.
For example, many trading systems were modified this week to conform with a new retail order-taking system introduced at the New York Stock Exchange and to accommodate a French securities transaction tax that took effect on Wednesday.
The U.S. Securities and Exchange Commission has been grappling for years with ways to create a national market system that uses technology to ensure that orders to buy and sell shares are sent to the best possible exchange, dark pool, or other venue. After the shock of the 2010 Flash Crash, it also began exploring fail-safe mechanisms to prevent technology-induced disasters.
Some of those measures, including halting trading in a stock that rises or falls beyond predetermined limits, kicked in on Wednesday, protecting investors but not saving Knight from losing big.
To be sure, many experts pooh-poohed the wider significance of Knight's problem.
"Coding problems happen, but it's not an industry issue," said Matt Andresen, founder of proprietary quantitative trading firm Headlands Technology and a former trading head at a Knight competitor. "I don't know what happened at Knight, but they had a self-inflicted problem that only hurt them. That's the way the market is supposed to work."
Maureen O'Hara, a finance professor at Cornell University who sat on a special advisory panel that explored Flash Crash reforms, agreed. "I'm very worried people will take a look and say there is something fundamentally wrong with the market, and there isn't," she said.
Some traders and critics said that more details need to come out before they could draw too many conclusions other than the importance of software testing.
One thing that's clear: the financial system is much more elaborate now than it was a decade ago, and finding solutions to market problems is not easy.
"We have a very complex financial system, bordering on the baroque," said NYU's Donefer.
(Reporting By Jed Horowitz, Daniel Wilchins and Lauren Tara LaCapra in New York, Joseph Menn in San Francisco, Sarah Lynch in Washington and Jeff Lukes in London. Writing by Dan Wilchins and Jed Horowitz; Editing by Martin Howell and Muralikumar Anantharaman)
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