Father of Algorithmic Trading Seeks Speed Controls
November 29, 2012
Then, he and his team of engineers affixed a large lens to the face of the Nasdaq terminal. That enlarged the text it displayed.
A foot away, a camera took in the data and fed it to an attached computer.
Then the data was decoded and plugged into the group’s algorithms.
How to get orders back into the Nasdaq terminal, one by one, using its keyboard only?
Metal rods, pistons and levers. An automated typing machine, as Steiner puts it. At that point, he could abide by Nasdaq’s rules, send out dozens of orders every 30 seconds and leave human traders, he felt, in his dust.
But starting a revolution? Not on his mind at all.
“To tell you frankly, I wasn’t even thinking about that,” Peterffy said.
The business has changed dramatically since the days when Peterffy skirted Nasdaq rules. What are the next steps for algorithms?
Peterffy says all trading eventually will be done electronically, but he adds a dividing line: Trading based on technical analysis will be figured out and executed exclusively by algorithms. But financial analysis of stock portfolios still will be done by humans.
In either case, the human role will be to oversee the programs that literally carry out orders, he says.
“They will feed the order into the algorithms and the algorithms will execute the order,” he says. “At Interactive, we have algorithms for our customers that our customers can use for any kind of trading.”
Human intervention, he says, will still be needed to manage “position risk in the sense that we need human eyes because we are never sure if any of our algorithms can never go off the deep end.”
Going off “the deep end” is an apt description of what happened, for instance, to Knight Capital on August 1. Its out-of-control algos nearly caused its destruction.
The flood of erroneous orders its computers sent out resulted in $456.7 million of losses for Knight in under 45 minutes.
This week, Knight is expected to field offers for a potential takeover of its operations. In August, it gave away 70% of its shareholders’ equity to a series of investors, led by Jefferies & Co.
Indeed, Peterffy concedes that market events, such as what happened to Knight, could repeat because computer programs can never be trusted “100 percent.”
Here’s his prescription of what to do. In particular, he wants rules that would slow high frequency trades.
“I would like the SEC slow them down by say a second or half a second, or something like that,” Peterffy said.The exchanges, he contends, have already defined what are high frequency trades so that should not be an issue.
“And I wouldn’t slow down all trades; I would only slow down the liquidity-removing trade. There’s a big difference. I wouldn’t change the liquidity-providing trades,” Peterffy adds.
But there are various ways of slowing down trading. These alternatives include a transaction tax, as has been implemented in France; a minimum quote life, as recommended by the European Union; and, letting all buy and sell orders in a given second be matched up and prioritized against each other, eliminating the push to shave more microseconds off getting to the front of the queue.