http://www.lrb.co.uk/v36/n17/donald-mackenzie/be-grateful-for-drizzle -----------------------------" By the time the old code was found and switched off, the firm [Knight] was on the brink of bankruptcy. Such events don’t always become public. In a New York coffeehouse, a former high-frequency trader told me matter of factly that one of his colleagues had once made the simplest of slip-ups in a program: what mathematicians call a ‘sign error’, interchanging a plus and a minus. When the program started to run it behaved rather like the Knight program, building bigger and bigger trading positions, in this case at an exponential rate: doubling them, then redoubling them, and so on. ‘It took him 52 seconds to realise what was happening, something was terribly wrong, and he pressed the red button,’ stopping the program. ‘By then we had lost $3 million.’ The trader’s manager calculated ‘that in another twenty seconds at the rate of the geometric progression,’ the trading firm would have been bankrupt, ‘and in another fifty or so seconds, our clearing broker’ – a major Wall Street investment bank – ‘would have been bankrupt, because of course if we’re bankrupt our clearing broker is responsible for our debts … it wouldn’t have been too many seconds after that the whole market would have gone.’ What is most telling about that story is that not long previously it couldn’t have happened. High-frequency firms are sharply aware of the risks of bugs in programs, and at one time my informant’s firm used an automated check that would have stopped the errant program well before its human user spotted that anything was wrong. However, the firm had been losing out in the speed race, so had launched what my informant called ‘a war on latency’, trying to remove all detectable sources of delay. Unfortunately, the risk check had been one of those sources. "------------------------------- When a single "-" can threaten a large investment bank or even the whole market, something is seriously wrong. As I have said before, this speed chase rewards the most reckless HFTs (those that leave out error checks to save computing time), until they spectacularly fail and threaten the system. Brokers and clearing firms need to check margin for ALL customers big or small before they accept any order. Exchanges need to check clearing firms' margin as well before they accept any trade.