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There is still risk. Even if you never lose money on a trade, your firm can lose money. You're paying fixed costs such as colocation. It's conceivable that all
by jarrett 13y ago
There is still risk. Even if you never lose money on a trade, your firm can lose money. You're paying fixed costs such as colocation. It's conceivable that all your trades are profitable, yet the sum of all those profits is lower than your fixed costs.
That becomes more likely for any given firm as the competition increases. Spreads get smaller; there's more competition for any given trading opportunity. For each firm, that can mean declining profits per trade and declining numbers of trades made. When the product of those two numbers gets too low, you're in the red.
- foobarqux 13y agoOr you can blow up like Knight.
- wglb 13y agoKnight had test code that got flipped into production. Worse, they ignored many alarms as the company was sinking.
- fr0sty 13y ago> Knight had test code that got flipped into production. This is not correct. Read the SEC report on the incident if you have time, it is pretty in depth: http://www.sec.gov/litigation/admin/2013/34-70694.pdf http://www.sec.gov/litigation/admin/2013/34-70694.pdf The short-version is that they re-used a parameter from an old feature and one of the production machines was not updated so the re-used parameter re-activated the old feature instead of the new one. Furthermore, A refactoring of the code had left the old feature on the wrong side of the share accounting code so the system was not keeping track of the orders it was putting out.
- wglb 13y agoThanks for that. But still it was not any kind of market or trading risk that blew them up--just a litany of control failures and bad code.