Last week I was on a panel at the Bloomberg Enterprise Technology Summit (@BBGlink) with Steve Goldman from CME Group (@CMEGroup), the CTO of NYSE Technologies, Bloomberg TV Markets Reporter Dominic Chu (@The_Domino) and we talked about how speed is important, but that the real innovation going on today is about making applications smarter, not just faster. The conversation was constructive and productive and was re-tweeted all over the internet.
Then, this weekend, Barron's article "Next Danger: 'Splash Crash'" featured an interview with Progress Software's CTO Dr. John Bates. Barron's cites his view that high frequency trading poses an "extreme risk" of creating a "splash crash," his own term, which he describes as a worse than the flash crash: "trading systems could clog up, limited bandwidth could choke orders, exchanges could freeze up -- splashing across all of the affected asset classes. Pandemonium."
Bates "frets that, absent more oversight, terrorists wielding smart machines could attack the markets in an attempt to cripple our economy," and has indeed been fretting publicly for a while now in interviews blog posts, such as:
- "The trouble with algorithms: wild children or reckless parents?"
- "Beware the splash crash"
- "Red flags in morning, firms take warning"
- "When does a rogue trader become a scoundrel?"
It's unhelpful to focus on the fear; we should focus on solutions. Every automated application - from kiosk-based airport check-in to security in a retail store - needs surveillance. Trading is no different. This is not new. What's new is that trading occurs at speeds never before seen, and when things go wrong, it's easy to blame the bankers of nefarious activity.
So today's article in MIT Technology Review, "Faster than a Flash," was a refreshing break from provocative predictions of doom and gloom. MIT features Boston-based proprietary trading firm PhaseCapital (disclosure: PhaseCapital is a StreamBase customer). CEO Eric Pritchett described to MIT reporter Erica Naone that his algorithmically-driven trading firm made NO erroneous trades on the day of the flash crash.
How did Phase Capital use algorithms and provide a safe trading harbor to their investors on the day of the flash crash? They use the same technology to analyze their market data in real-time that they use to trade in real-time: complex event processing, or CEP (intro here).
Corwin Yu, director of electronic trading for PhaseCapital, explained their innovation this way:
Typically, PhaseCapital processes 30,000 to 40,000 'ticks,' or pieces of market data, per second. During the flash crash, that number jumped to more than 289,000 ticks per second— much of it representing stocks swinging wildly. "A lot of scrubs kicked in and realized that this data didn't make sense," Yu says. For example, some large publicly held companies, such as Accenture, traded for less than $1 during the flash crash. PhaseCapital continued trading, but filtered data that appeared suspicious. Because it didn't act on that data, it was spared erroneous trades.
Yu concluded that speed is essential in the world of trading today, but that the trick is to be "fast and smart." Read about PhaseCapital's innovation in MIT Technology Review.
The solution for a safer market isn't heavy-handed regulation of "wild, reckless algorithms" in order to catch the "scoundrels" of Wall Street. Fast does good on Wall Street; but fast and dumb is dangerous. So we should tune out the fear mongers and tune in to the innovators that can help make Wall Street be fast - and smart.
