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I work in this area, and the market risk you allude to here is not the one that scares me. The scary one is what I like to call algorithm or system risk. The

I work in this area, and the market risk you allude to here is not the one that scares me. The scary one is what I like to call algorithm or system risk. The 2003 Corinthian Colleges incident mentioned on page 3 of the article is a good example, but I've seen much worse. I once saw a major bank take literally a billion dollars of risk on in approximately 10 seconds due a bug in their algorithm (most likely a new release of a modified program) that interacted with a poorly implemented exchange interface. Some of their counterparties let them out of the trades and some didn't. Releasing new software can be a hair raising experience due to the poor quality of testing systems provided by the exchanges, the speed at which money losing trades can happen, and the vast complexity of the environment faced by the software.

imajes 17y ago
I wonder how long / how hard it'd take to implement a shadow exchange to test new algos and systems... Like, perhaps new code needs to be certified in a full test environment before being deployed to the live market? Seems like something along those lines would adequately deal with the uncertainty risk here.
- sophacles 17y ago
  I think one of the problems comes from the fact that big players affect the game. So if say, Citi launches a new algorithm that does some new crazy thing, which turns out to trigger random issues or unexpected responses in other algorithms -- such a thing could make lots of people other than citi a pile of money. Are those people really going to want Citi to test it too well? Another, real concern with such a shadow market, where say everyone is running their algorithms (to prevent the above scenario), is that i could test "a buggy version" and find holes and odd behaviors of my competetors for free, since it is all play money.
- bd_at_rivenhill 17y ago
  Most exchanges have their own API for direct access. Although there is some standardization around the FIX protocol, the fastest access is still usually through the direct API, so while you may have a single backend system that processes incoming data and generates orders, you still usually need to code a separate interface for each exchange that you connect to, and the systems provided by the exchanges to help you test your interface tend to be less than robust.

imajes 17y ago

I wonder how long / how hard it'd take to implement a shadow exchange to test new algos and systems... Like, perhaps new code needs to be certified in a full test environment before being deployed to the live market? Seems like something along those lines would adequately deal with the uncertainty risk here.

sophacles 17y ago
I think one of the problems comes from the fact that big players affect the game. So if say, Citi launches a new algorithm that does some new crazy thing, which turns out to trigger random issues or unexpected responses in other algorithms -- such a thing could make lots of people other than citi a pile of money. Are those people really going to want Citi to test it too well? Another, real concern with such a shadow market, where say everyone is running their algorithms (to prevent the above scenario), is that i could test "a buggy version" and find holes and odd behaviors of my competetors for free, since it is all play money.
bd_at_rivenhill 17y ago
Most exchanges have their own API for direct access. Although there is some standardization around the FIX protocol, the fastest access is still usually through the direct API, so while you may have a single backend system that processes incoming data and generates orders, you still usually need to code a separate interface for each exchange that you connect to, and the systems provided by the exchanges to help you test your interface tend to be less than robust.