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Sunday, August 12

12th Aug - Weekender: HFT = Knightian Uncertainty

In economics, Knightian uncertainty is risk that is immeasurable, not possible to calculate. Knightian uncertainty is named after University of Chicago economist Frank Knight (1885–1972), who distinguished risk and uncertainty in his work Risk, Uncertainty, and Profit – wikipedia and MIT

Knight Capital Groupwikipedia, homepage 

Previously on MoreLiver’s:

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Raging Bulls: How Wall Street Got Addicted to Light-Speed TradingWired
Wall Street used to bet on companies that build things. Now it just bets on technologies that make faster and faster trades.

After Knight Capital's Failed Gambit, Algo Trading Needs a MoatAdvanced Trading
Until we create a system that can view the entire market with accurate data and powerful system checks, why not confine all algorithmic trading to one session? Call it The Algo Hour.

How the Buy Side Can Protect Against Rogue Algos, Broker ErrorAdvanced Trading
In the aftermath of the fallout stemming from Knight Capital Group's disastrous trading error, Tabb Group's Miranda Mizen breaks down steps the asset management community can take to protect themselves from market mayhem.

(audio 25min) In the Balance: The risk of robo-tradingBBC (mp3)
US trading company Knight Capital has been rescued, after being brought to the edge of bankruptcy by a computer glitch. The errors may be small in themselves, but the repercussions of automated trading may be enormous. Are we going to move into a world where, loosely, robots are in control of our stockmarkets? And the benefits, or otherwise, of corporate entertaining.

Automated trading: The Lazarus of Wall StreetThe Economist
After an almost-fatal shock, Knight Capital returns to life

High-frequency trading: Wait a secondThe Economist
The latest cock-up on Wall Street shows that more safeguards are needed

History of Algorithmic Trading Shows Promise and PerilsView / BB
We may never return to primary reliance on fundamental analysis and computer-aided trading. Chartists and algorithmic traders now rule the day, and computers now do battle against one another’s algos. If the history of such technology tells us anything, it’s that we can expect more meltdowns.

In $440 Million Trading Error, Upside of Wall St. FailuresDealBook / NYT
it may be that new rules are needed in light of Knight, but it should also be recognized that we can’t just regulate failure away without eliminating risk, too. And we can’t have a financial system without both.

Knight, Knight, Automated Trading Dreams The Psy-Fi Blog
Firstly, the rise of machine driven trading is exposing markets to risks that aren’t manageable.  Secondly, the people regulating the markets don't understand, or don't want to acknowledge, what those risks actually are. Behind this lies a fundamental issue: you can regulate to punish people retrospectively for their failures or you can limit innovation to reduce the probability of the issues happening in the first place.  It’s time to focus on the latter rather than the former because, if "this could happen to anyone" it could happen to you.

The Knightmare ExplainedNanex
The following theory fits all available facts. We believe Knight accidentally released the test software they used to verify that their new market making software functioned properly, into NYSE's live system.

Chart of the day, HFT editionFelix Salmon / Reuters
This astonishing GIF comes from Nanex, and shows the amount of high-frequency trading in the stock market from January 2007 to January 2012. (Which means that the Knightmare craziness of last week is not included.)

The Dread of the UnknownDealBook / NYT
The hope is that the Knight debacle was a freak accident. But in today’s market, how could we ever know?

Why Are Investors Fleeing Equities? Hint: It’s Not the Computers – DealBook / NYT
NYT's Sorkin Gets it Wrong – Better Markets
Small investors vs high-speed traders – Felix Salmon / Reuters
First NYT's Sorkin & Now Reuters' Felix Salmon Battle Better Markets – Better Markets
Dennis Kelleher, Libor, and high-frequency trading – Felix Salmon / Reuters

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