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Forum Post: Knight Capital and the Return of Feudalism

Posted 2 years ago on Aug. 3, 2012, 7:29 p.m. EST by ThomasKent (129)
This content is user submitted and not an official statement

Is feudalism the natural order of things? Somtime during the 20th century capitalism was captured by banking feudalism.

Max Keiser on Too Big to Fail

http://www.youtube.com/watch?v=qiaax9GHFL0&list=PL57A38F2F2E292781&feature=view_all

As the leader of one of the largest brokerage firms in the nation, Thomas M. Joyce has been an unapologetic advocate of electronic trading and one of the most vociferous critics of companies that struggled to keep up with the ever-changing stock market.

Nimble Knight Capital

http://dealbook.nytimes.com/2012/08/02/trying-to-be-nimble-knight-capital-stumbles/

Computers have given us robo-callers, avatars, and telephone answering menus that have a very limited ability to interact with customers and screen calls. The computer has replaced people who were doing these functions. This has created millions of dislocated workers. Yet the cost of living continues to rise while these people have even less earning power. Would a knowledge revolution have caused or allowed this to happen?

Computers are fast. Computers have been involved in several Wall St. crashes. The most popular explanation for the 1987 crash was selling by program traders. Accountants investigating such a crash today may be faced with a problem similar to finding a needle in a haystack. When people work with exotic computers systems they don’t really know what’s happening, what happened or what’s going to happen. Billions of dollars disappearing without human initiation or intervention while government and investors are oblivious. This is sort of the opposite of knowledge.

Briefing: Computer traders blamed for Wall Street crash

When the Dow Jones stock market index suffered its largest ever single-day drop (May 2010), fingers were soon pointing at the high-frequency traders and the computer programs they rely on. Are computers now too powerful to be allowed in financial markets?

Could computer traders bring down Wall Street? It certainly seemed plausible at 2.30 pm in New York on 6 May. Traders went into a panic as the Dow Jones index, which follows 30 large publicly traded companies plunged an unprecedented 6 per cent in 20 minutes – for no apparent reason.

http://www.newscientist.com/article/dn18900-briefing-computer-traders-blamed-for-wall-street-crash.html

http://en.wikipedia.org/wiki/Black_Monday_(1987)

http://www.usfinancialpost.com/wall-street-flash-crash-caused-by-computer-algorithm-on-dow-jones/85837/

It took six months for the government to find out what a computer did in twenty minutes by one robo-trader. This is only the tip of the iceberg. There are robo-traders everywhere and no one knows what they are doing.

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11 Comments


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[-] 2 points by JackHall (398) 2 years ago

The history of Wall St has been riddled with instability and intrigue from the beginning.

"The year was 1792, and Wall Street had just experienced its first crash, for which William Duer and a secret circle of New York grandees were mainly to blame. They had conspired to speculate on the bonds just issued by the newly created federal government. Soon they found themselves deeply overcommitted and forced to liquidate their holdings, causing the fledgling market to collapse and its manipulators to flee-in Duer's case to debtors' prison; for the more fortunate among them to safer havens out of state."

"Hamilton was a Revolutionary War hero and a founding father. But by the 1790s, he was also the man most widely suspected of harboring elitist sentiments dangerous to the democratic aspirations of the new nation. During the Constitutional debates he had argued on behalf of a lifetime presidency and imagined the Senate as a kind of House of Lords. In his capacity as President George Washington's secretary of the treasury, he had devised a plan for funding the national debt that had accumulated during the war and in the years afterward. The federal government would sell its own bonds to make good on the nearly worthless securities issued by the states and the Continental Congress during the Revolution. Hamilton assumed that the purchasers of these new securities would be merchants, bankers, and others of substantial means. By acquiring these bonds they would help establish the creditworthiness of the new nation. In turn, that would, Hamilton hypothesized, attract capital from home and abroad which would jump-start the commercial and industrial development of what was, after all, an underdeveloped country."

As the Democratic-Republicans saw it, this was a plot to establish a financial aristocracy like the one ensconced in England. Looking across the ocean they could easily see how an incestuous relationship between the money men and the central government (in England, the monarchy; in America, presumably, the executive branch) threatened to make the government the exclusive preserve of the privileged. The great executive powers of France and Great Britain, so the anti-monarchists believed, floated on a vast sea of public debt. That funded debt had in turn engendered big banking institutions, well-oiled markets for money, new forms of investment, and a whole new class that traded in public securities. An alliance between this moneyed class and the Crown had overawed independent sources of political authority. According to Jefferson the real sin in Hamilton's design was that it would "prepare the way for a change from the present republican form of government to that of a monarchy of which the English constitution is to be the model""

"Jefferson and his allies were not against trade. But they envisioned an agrarian republic, not a commercial one, made up of independent middling farmers trading with Europe only for those necessities not produced at home. In this way the new nation would be immunized against the infection of urban luxury and squalor, the war of class against class, and the moral rot that they felt characterized the Old World. "

"All through the 1790s, publicists, pamphleteers, and politicians warned about bankers and speculators fattening on the public credit. Even President Washington, who in the end favored Hamilton's strategy, worried, and he queried the treasury secretary: Would not the new capital ultimately pose a threat to republican government by "a corrupt squadron of paper dealers"? Hamilton's plan was a bonanza for such people, an unholy alliance of aristocracy and money. These speculators had bought up the securities issued by the states and the Continental Congress at rock-bottom prices from their original holders: desperate veterans, farmers, and other ordinary folk. Under Hamilton's scheme these rich bond buyers could now redeem their once worthless paper at its full face value."

A Long View of Wall Street

http://www.npr.org/templates/story/story.php?storyId=95241895 [right click]

In our third century our plight is even worse today as bankers and paper dealers (Goldman Sachs) have taken control of our government and we can't afford to buy it back.

Max Keiser on Superstitious Trading http://www.youtube.com/watch?v=LGK4_ItBORc&feature=youtu.be [right click]

[-] 1 points by ThomasKent (129) 2 years ago

What changes are needed to eliminate the massive debt?

[-] 1 points by JackHall (398) 2 years ago

Usury needs to be controlled. Right now banks can compound interest at rates on debt close to 20% simply because the contract says so. While interest on savings is close to 1%. These contracts should be voided by the government and rewritten to profit ordinary people as well as banks on the basis of common sense, convnience, simplicity, equality and fairness.

[-] 1 points by enough (589) 2 years ago

The SEC knows exactly what Wall Street high-frequency traders are doing, but they are deliberately looking the other way. Robo-trading is over 70% of market volume. Stop robo-trading at this point and the market collapses. The SEC let robo-trading dominate and take over the market, claiming high-frequency trading provides liquidity by narrowing the gap between bid and ask prices. This effect is ephemeral because volume does not equal liquidity. Liquidity dries up in seconds when high-frequency traders detect a significant order imbalance in the market, which is what happened on May 6, 2010. When robo-traders automatically pull their bids and sell their momentary positions in tandem, the market craters. The SEC never addressed the root of the problem; i.e., high frequency manipulative trading; instead, they inserted circuit breakers which would automatically trip if the market dropped below predetermined limits. This is a joke because investors will simply continue to sell once the breakers are reset, creating a cascading waterfall crash. The SEC makes believe it regulates Wall Street and Wall Street makes believe it is regulated.

[-] 1 points by ThomasKent (129) 2 years ago

Huffington Post reported U.S. regulators are working to figure out whether the trading snafu at Knight Capital Group that resulted in a $440 million loss and nearly destroyed the firm was exacerbated by a breakdown in risk management, according to a source familiar with the situation.

A team of U.S. Securities and Exchange Commission's trading and markets division staff and the Office of Compliance Inspections and Examinations are focused on trying to uncover what happened and whether the problem should have been caught, said the source, who declined to be identified because the individual is not allowed to talk to the press.

Wall St doesn’t know what happened with the Knight Capital Robo-trader that nearly blew-up the company. SEC is still trying to figure out the details. The robo-bomb was reported on August 2, 2 weeks ago.

Knight's trading glitch was the result of old software that was ‘somehow’ activated, unleashing a flood of errant trades into the stock market on Aug. 1. The software problem at Knight caused the firm to buy and sell about 150 different stocks over 30 to 45 minutes, amassing a $7 billion position it later had to unload at a loss.

Knight Capital was the largest U.S. retail market maker in 2011. Market makers buy and sell shares on behalf of clients and step in to provide liquidity using their own capital. The trading program was the latest technology snafu to overwhelm a market dominated by high-speed trading.

Hufffingon Post Update on Knight Capital Robo-trader glitch http://www.huffingtonpost.com/2012/08/16/sec-knight-review_n_1791981.html?utm_hp_ref=business [right click]

To err is human. To really foul things up takes a computer and crappy design, and poor acceptance testing. What a high pressure job programming the high frequency Robo-trader must be. A friend of mine plays at a cyber casino on her smartphone several hours a day. But it would be impossible for her to lose $440 million in 45 minutes. In other words humans have value after all. They are slow.

Just from the design point of view and IT management role it seems pretty weird that the errant Robo-trader seemed to have an American Express Gold Card line of credit. Didn’t anybody know this Knight Capital Robo-trader didn’t have $7 billion in the bank? The FDIC insures accounts up to $250,000. Maybe there should be alarms going off signaling consultation and confirmation with a human being is required when a Robo-trader crosses a predetrmined aggregate threshhold in a prescribed time period, say 10 minutes. A little human intervention every 10 minutes or so could save a company $100s of millions. A few saves could mean bonuses for everybody.

Needless to say Knight Capital didn’t have $440 million in petty cash to cover its losses from the Robo-trades on August 1, 2012. Knight Capital CEO Joyce went to the major Wall St financial firms for emergency funding. Sources say many of the Wall St firms have had Robo-Trader issues at one time or another. They were sympathetic and provided cash to keep Knight Capital in business.

This is really hard ball, cut throat, highway robbery. Those contracts could have been rendered void if there were laws written for occasions when a Robo-trader trades in error. What kind of insurance would be able to cover bad computer programming?

Knight Capital Asks for Emergency Funding from JP Morgan

http://online.wsj.com/article/SB10000872396390444233104577591603311346674.html [right click]

Max Keiser on Magical Thinking

http://www.youtube.com/watch?v=SgNgPY3B4jI [right click]

[-] 1 points by enough (589) 2 years ago

If one looks at how Knight's algo executed its trades when it went berserk, it appears that the automated trading sequence was done intentionally either by a rogue trader or programmer inside Knight or by an outside hacker. The algo repeatedly bought the ask price of certain stocks and sold the bid price of other stocks, turbo-charging Knight's losses to the tune of the $15 million per minute. Such deliberate targeting of certain stocks to buy and others to sell is more reflective of intentional rather than errant behavior. Algos usually buy and sell shares in the same stock a few milliseconds apart. Algos do not continually buy the same stocks every few milliseconds and continually sell other stocks every few milliseconds, as was the case with the Knightmare algorithm. This makes absolutely no sense unless the intention is to self-destruct.

More tell-tale was the fact that there were no automatic shut-down provisions incorporated into Knight's code to stop the losses when the high-speed trading ran beyond preset limits and parameters, as is normally the case with high-frequency algorithms. If indeed the Kightmare was caused by a rogue trader or programmer or a hacker, it can happen again at any time. Yet, we do not hear very many financial reporters in the media paying much attention to this possibility. The media instead uses words like "errant' or "trading snafu" to describe the algorithm that went awry. It hasn't occurred to many folks that the Knight algo may have done exactly what it was designed to do: destroy a trading firm in a matter of minutes. It behaved more like a Stuxnet virus than an errant computer program until Knight finally pulled the plug.

[-] 1 points by ThomasKent (129) 2 years ago

The idea of Knight Capital being hacked is very interesting. Almost anything is possible in cyber space. The time lapse between the event and resolution should be unacceptable normally. We're talking about weeks of investigation that may have been prevented with a design walkthrough, code walkthrough and rigorous testing.

So the programmers said the program was unit tested. That, and the threat of immediate dismissal, could be all of the quality control there was/is.

Far worse would be transient code that could appear from any location, execute in memory, and then disappear on schedule without detection. Are people spinning their wheels looking at thousands of lines of code, when memory dumps might hold the answer?

Who might the hackers be? They might be foreign government actors. They could be alien contractors that had access to hardware and software. This could be a covert black ops infiltration into algorithmic trading. A robo-trading conspiracy that used Knight Capital to create a smoke screen while trillions of dollars vaporized undetected wouldn't surprise me. After all $2.3 trillion disappeared from the Pentagon over 10 years ago and hasn't been found yet, and even more puzzling: the US economy didn't crash?

Max Keiser on Aliens and Bankers http://www.youtube.com/watch?v=vDwO08IQR9A&feature=youtu.be

[-] 1 points by shadz66 (19985) 2 years ago

"Financial Holocaust : Bankster Fraud Has Driven 100 Million Into Poverty, Killing Many

"The mouthpieces in Wall Street and D.C. pretend that financial fraud (like Libor) is a “victimless crime“. But the World Bank notes that the financial crisis – you know, the one caused by financial fraud – has driven between 64 and 100 million people into destitution."

fiat justitia ...

[-] 0 points by stephinrazin (-1) 2 years ago

END THE FED! A private federal reserve is tyranny!

[-] 1 points by VQkag2 (16478) 2 years ago

greedy corrupt bankster bastards! End the fed!

[-] -1 points by hchc (3297) from Tampa, FL 2 years ago

May 10th was nothing more than a message to the legislators who were writing Frank-Dodd to remember who the hell they work for.

[-] 1 points by DouglasAdams (169) 2 years ago

Well, they are not working for us.

Max Keiser Vampire Banker Hunter part 1 http://www.youtube.com/watch?v=E2pDFmgejsQ&feature=youtu.be

Max Keiser Vampire Banker Hunter part 2 http://www.youtube.com/watch?v=eA6DKScMROQ&feature=youtu.be