By Lev Lesokhin, EVP, Strategy and Market Development, CAST
“Kill Switches” are being hailed as the solution to the algorithmic or High-Frequency Trading (HFT) problems witnessed this year at NASDAQ, BATS and Knight Capital.However, wise financial professionalswould be misguided to put all their hope into these switches – they can only be as effective as the software operating underneath them.
Circuit Breakers and ‘Kill Switches’ have been around for a while. For example, the regulators installed circuit breakers after the “Flash Crash” in 2010. Kill Switches are intended to be deployed by exchanges and are designed to halt trading when the value of the market goes down more than a set percentage within a specific period of time.
There is still a live debate whether either mechanism should be set as a ‘business rule’ or triggered by a human monitoring how firms are trading on that exchange. These measures exist because of the speed and volatility financial markets have witnessed in recent years.
Currently there is renewed focus on Kill Switches because of the slew of recent trading glitches, leading to serious problems and capital losses. These mechanisms attempt to increase the safety of the markets and reassure investors’ confidence.
But there is a flaw in the plan. Kill Switches supposedly ensure an exchange can shut its trading off instantaneously and, in many cases, even roll back some of those trades should a trading firm or market maker exhibit erratic trading behaviour. This puts pre-emptive control in the hands of the exchanges to help their clients prevent trading disasters, such as Knight Capital. But can experts at the exchanges detect unusual behaviour quickly and prevent it from causing a disaster?
These safeguards are specifically targeted at Algorithm driven, High-Frequency Trading operations.However, technical glitches in trading systems can be exacerbated by fast algorithm-based trading and quickly spin out of control killing an entire platform, freezing out a market, so both the guilty and innocent are punished. This can lead to legal cases for both losses and lost profits. Arguably, everyone loses.
The issue is that kill switches absolutely do not address the fundamental problem in the markets today – which is the technology underpinning all the exchanges and trading systems. This trading technology is being pushed very fast, in rapid iterations. All of us in software engineering know, all else being equal, the more quickly and frequently you release complex systems the more risky they are in production. As new software gets rolled out on top of the old, all sorts of unpredictable things start to happen. This is true in every software-intensive industry, but has a very high impact in trading systems.
Trading software development houses, and the exchanges themselves, all suffer from lack ofoversight over their software structure. All these organizations rely on testing to ensure quality. Testing is not enough – you can ask the COO of BATS, who actually did test their systems pretty sufficiently. Scarily, most institutional finance organisations don’t even do that.
Despite thisKill Switches are important, useful mechanisms for the market operators to have at their disposal. The recent events involving technical glitches pushed this discussion to the fore – and that’s not inherently a bad thing. It’s an advance in the markets that we have more ways to control trading flow and volatility, and to prevent irregularities.
Kill switches may help the regulators and the exchanges ensure the damage done by software glitches and errant systems is not as cataclysmic as Knight Capital became. However,Kill Switches are just a control measure built to defend against what has been occurring, and will continue to occur even more frequently. While they might pick up some glitches, limiting losses to only millions, instead of hundreds of millions, they do not address the issue at the cause. More importantly their intended aim of reinstating confidence in the markets is not going to be achieved.
The technical glitches recently roiling the markets are in the main the basic coding problems we see over and over again in many industries. With BATS, there was a single line of code that tripped up the entire exchange. With NASDAQ there was a concurrency problem that put the system into an infinite loop. With Knight, we had an issue of “dormant” code that suddenly got reactivated. These are problems we see everywhere in industry, and many industries are starting to get structural software quality under control. Institutional trading is not among the fastest to do so unfortunately and the current debate is missing the point.
At some point, the exchange operators, banking institutions and the regulators have to agree to measure and control the structural quality of their business. It’s easy to forget that the markets are completely riding on software, which is getting more and more complex, and growing more and more rapidly every day. While the industry is well adept at hiring and paying for the top of the programming industry’s bell curve, these systems are reaching a point of complexity well beyond the capabilities of these programmers. Our best super-programmers can no longer handle the structural complexity of the systems they’re grappling with and they need guidance and oversight to secure the integrity of our financial markets.
Dollar edges lower as investors favor higher-risk currencies
By Stephen Culp
NEW YORK (Reuters) – The dollar lost ground on Friday as market participants favored currencies associated with risk-on sentiment over the safe-haven greenback.
Risk appetite was stoked by better-than-expected economic data and expectations that U.S. President Joe Biden’s proposed $1.9 trillion coronavirus relief package will come to fruition.
“The dollar’s down against other currencies but not by a whole lot,” said Oliver Pursche, president of Bronson Meadows Capital Management in Fairfield, Connecticut. “I expect the dollar to be where it is now at the end of the year, and the main reason for that is while I see some signs of improvement in the economy, monetary policy is going to stay where it is.”
“I don’t think the dollar is underpriced or overpriced,” Pursche added.
For the week, the dollar slid about 0.2% against a basket of world currencies, the euro was essentially flat, and the yen lost more than 0.5%. But the British pound advanced more than 1.1% against the dollar, its best week since mid-December.
Bitcoin continues soar to record highs. The world’s largest cryptocurrency was last up 6.6% at $54,961.67, hitting $1 trillion in market capitalization.
Its smaller rival, ethereum, was last up 0.7% at $1,953.28.
The digital currencies have gained about 89% and 1,420%, respectively, year to date, leading some analysts to warn of a speculative bubble.
“One concern I’ve always had (about cryptocurrencies) is how susceptible they are to manipulation,” Pursche said. “But they’re going to continue to gain legitimacy.”
“While it’s great that Tesla made an investment in bitcoin, I’m more intrigued by Blackrock and other major investment firms taking a hard look at cryptocurrencies as a viable investment.”
The Australian dollar, which is closely linked to commodity prices and the outlook for global growth, was last up 1.21% at $0.7863, touching its highest since March 2018.
The New Zealand dollar also gained, closing in on a more than two-year high, and the Canadian dollar advanced as well.
Sterling, which often benefits from increased risk appetite, rose to an almost three-year high amid Britain’s aggressive vaccination program. It had last gained 0.27% to $1.40.
The euro showed little reaction to a slowdown in factory activity indicated by purchasing manager index data, rising 0.21% to $1.2116.
The yen, gained ground against the dollar and was last at 105.495, creeping above its 200-day moving average for the first time in three days.
(Reporting by Stephen Culp, additonal reporting by Tommy Wilkes; editing by Jonathan Oatis)
Shares rise as cyclical stocks provide support; yields climb
By Saqib Iqbal Ahmed
NEW YORK (Reuters) – A gauge of global equity markets snapped a 3-day losing streak to edge higher on Friday, as the recent selling pressure on high-flying big technology-related stocks eased even as investors showed a preference for economically sensitive cyclical sectors.
Oil prices fell from recent highs as Texas energy companies began preparations to restart oil and gas fields shuttered by freezing weather, while the U.S. Treasury yields extended their recent rise.
The MSCI’s global stock index was up 0.47% at 681.88, after losing ground for three consecutive sessions.
On Wall Street, stocks steadied as cyclical sectors edged higher while tech names made modest advances after concerns about elevated valuations led to some selling in recent sessions.
“What we saw (this week) represents a market that is tired and may not do very much. So we are headed for some sort of a pullback, but I don’t think we’re there just yet,” said Peter Cardillo, chief market economist at Spartan Capital Securities in New York.
“Investors are not really pulling out of the market, but they are becoming more cautious. It already has factored in another good positive earnings season.”
The Dow Jones Industrial Average rose 119.97 points, or 0.38%, to 31,613.31, the S&P 500 gained 12.93 points, or 0.33%, to 3,926.9 and the Nasdaq Composite added 92.58 points, or 0.67%, to 13,957.93.
The S&P 500 technology and communication services sectors, housing high-value growth stocks, were among the smallest gainers in early trading, while financials, industrials, energy and materials rose more than 1%.
European shares edged higher on Friday as an upbeat earnings report from Hermes boosted confidence in a broader economic recovery. The pan-European STOXX 600 index was 0.64% higher.
U.S. Treasury yields on the longer end of the curve rose to new one-year highs on Friday as improved risk appetite boosted Wall Street, while the yield on 30-year inflation-protected securities (TIPS) turned positive for the first time since June.
Core bond yields have pushed higher globally, led by the so-called reflation trade, where investors wager on a pick-up in growth and inflation. Growing momentum for coronavirus vaccine programs and hopes of massive fiscal spending under U.S. President Joe Biden have spurred reflation trades.
The benchmark 10-year yield was last up 5.1 basis points at 1.338%, its highest level since Feb. 26, 2020.
Oil prices retreated from recent highs for a second day on Friday as Texas energy companies began preparations to restart oil and gas fields shuttered by freezing weather.
Unusually cold weather in Texas and the Plains states curtailed up to 4 million barrels per day (bpd) of crude oil production and 21 billion cubic feet of natural gas, analysts estimated.
Brent crude futures were down 28 cents, or 0.44%, at $63.65 a barrel, while U.S. West Texas Intermediate (WTI) crude futures fell 66 cents, or 1.09%, to $59.86.
Copper jumped to its highest in more than nine years on Friday and towards a third straight weekly gain as tight supplies and bullish sentiment towards base metals continued after the Chinese New Year.
Spot gold XAU= was down 0.58% at $1,785.71 an ounce.
The dollar lost ground on Friday, extending Thursday’s decline as improved risk appetite sapped demand for the safe-haven currency and drew buyers to riskier, higher-yielding currencies. The dollar index was off 0.295%.
Bitcoin hit yet another record high on Friday, hitting a market capitalization of $1 trillion, blithely shrugging off analyst warnings that it is an “economic side show” and a poor hedge against a fall in stock prices.
(Reporting by Saqib Iqbal Ahmed; Editing by Nick Zieminski)
Oil falls after surging past $65 on Texas freeze
By Stephanie Kelly
NEW YORK (Reuters) – Oil prices fell on Thursday despite a sharp drop in U.S. crude inventories, as market participants took profits following days of buying spurred by a cold snap in the largest U.S. energy-producing state.
Brent crude fell 41 cents, or 0.6%, to settle at $63.93 a barrel. During the session it rose as high as $65.52, its highest since January 2020.
U.S. West Texas Intermediate (WTI) crude futures fell 62 cents, or 1%, to settle at $60.52 a barrel, after earlier reaching $62.26, the highest since January 2020.
Brent had gained for four straight sessions before Thursday, while WTI had risen for three.
“The market probably got a little bit ahead of itself,” said Phil Flynn, a senior analyst at Price Futures Group in Chicago. “But make no mistake, this selloff in oil doesn’t solve the problems. The problems are going to persist.”
Though some Texas households had power restored on Thursday, the state entered its sixth day of a cold freeze. It has grappled with refining outages and oil and gas shut-ins that rippled beyond its border into Mexico.
The weather has shut in about one-fifth of the nation’s refining capacity and closed oil and natural gas production across the state.
“The temporary outage will help to accelerate U.S. oil inventories down towards the five-year average quicker than expected,” SEB chief commodities analyst Bjarne Schieldrop said.
Prices dropped despite a decrease in U.S. oil inventories. Crude stockpiles fell by 7.3 million barrels in the week to Feb. 12, the Energy Information Administration said on Thursday, compared with analysts’ expectations for an decrease of 2.4 million barrels.
Crude exports rose to 3.9 million barrels per day, the highest since March, EIA said.
“The big nugget was the big jump in exports of crude oil,” said John Kilduff, partner at Again Capital in New York. “We’ll have to see what happens with that next week weather in Texas, but I have been looking for a pickup there for a while.”
Oil’s rally in recent months has also been supported by a tightening of global supplies, due largely to production cuts from the Organization of the Petroleum Exporting Countries (OPEC) and allied producers in the OPEC+ grouping, which includes Russia.
OPEC+ sources told Reuters the group’s producers are likely to ease curbs on supply after April given the recovery in prices.
(Additional reporting by Yuka Obayashi in Tokyo; editing by Emelia Sithole-Matarise, Steve Orlofsky, David Gregorio and Jonathan Oatis)
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