A Dark Knight For Trading...

Are these gyrations the dawn of more NYSE angst?

Wall Street and its arcane world of securities trading — could anything be more complex? But really, the principles of stock trading are forthright and easily understood, and haven’t much changed in a couple centuries…

You buy fractional ownership in a corporation. You make money, if not through dividends or shares of profit, then by reselling your shares as their values tick higher. Thus the familiar refrain, buy low/sell high.

The complexities creep in as you try to wrest loose every erg of possible profit. Can revenue be gained when share prices rise by a quarter penny or so? It can, but only when you’re trading thousands of shares, thousands of times per second. Here’s where trading software comes in, the likes of which has revolutionized the securities market.

But it’s also imperiled it.

On August 1, 2012 the Knight Capital Group began executing a series of erratic, rapid-fire transactions that had over 100 stocks gyrating wildly for more than 45 minutes, until the NYSE suspended trading. In the meantime Knight was losing more than $10 million per minute, for a final hit that equaled more than quadruple that firm’s total profit last year.

The culprit of course was software. Knight was trying out a new trading algorithm that had been regrettably rushed into service without due testing and bug-fixing. When you or we come up against a bug, we might curse at a blue screen for a while. When it happens to a company like Knight (which executes trades for Citigroup, TD Ameritrade, and others, and was responsible for 11% of all U.S. securities trading in the first half of this year), markets shudder.

It’s a fact of life in this new century of ours that we rely on technology in more ways than we can count. It’s also a fact that our reliance sometimes outstrips the technology’s capabilities. There’s nothing abstract about binary code that can eliminate vast fortunes in the blink of an eye. We have software today that can bankrupt companies and destroy lives.

If we’re resolved to keep it, then we’d better find a way to make it work.

The C4:

1. On August 1, a trading-software glitch caused 45 minutes of erratic stock transactions that have so far cost the Knight Capital Group $440 million and over 75% of their company value. They’re likely headed for bankruptcy.
2. This is hardly the first time this sort of thing has happened. The Facebook IPO in May was marred by a $40 million glitch and the 2010 “Flash Crash” caused a thousand-point swing in the Dow Jones Industrial Average in just over six minutes.
3. Every broker, day-trader, and 401k dabbler relies on stock-trading software. It’s made our modern securities market possible.
4. But when it goes wrong the consequences are devastating. The risks here are way too high. Stricter regulation is never a popular solution, but if anyone has a better idea for protecting our markets from software glitches, we’re all ears.  

Is Lehman's off the ropes?

Will the Wall Street cornerstone climb back in the ring?

Looking back, the financial collapse of 2008 seemed to move like a glacier: slowly, inexorably, unstoppably. But in the midst of that slow-mo meltdown, a few memorable events struck with tectonic suddenness, altering forever our financial landscape and leaving us to wonder if there could ever be a recovery from such unprecedented economic shock.

The worst, by far, had to be the September 2008 collapse of Lehman Brothers, a 161-year-old cornerstone of Wall Street investment banking. Like so many bank failures of the time, this one was fueled by twin mistakes: an over-investment in mortgage-backed securities, and an inadequate supply of capital to cover the bets that were destined to go sour. The only unique part of Lehman’s story was the scale: they went down holding nearly $1 trillion in debt, resulting in the largest bankruptcy in U.S. history.

Knowing that, what do you say when Lehman’s emerges from Chapter 11 a mere three and a half years later? “Miraculous,” is what the bankruptcy judge said, and he’s right.

Despite its bankruptcy, Lehman’s was always flush with assets. Their real-estate holdings include some of the world’s most profitable hotels and office space. They’ve got tens of billions in private-equity investments and corporate bonds. They even own a sizable stake of Formula One Racing.

The management of Lehman Brothers has spent the last three years creating a liquidation plan, to turn those assets into a payday for Lehman creditors. The first checks are scheduled to go out in April, and are expected to total about $65 billion, or 17 cents on the dollar.

Not a great return, but certainly better than nothing, and probably much better than most creditors expected. 

So which part is miraculous — that Lehman’s has emerged from bankruptcy, or that they seem to be doing all they can to make things right? Either way it’s a sight to behold, and it’s nice to believe in miracles again.

The C4:

1. Lehman Brothers filed for Chapter 11 bankruptcy on September 15, 2008. It was the largest bankruptcy in U.S. history and one of the defining events of the Great Recession. 
2. Lehman’s is unwinding over $600 billion worth of debt by liquidating approximately $65 billion in assets.
3. After just three and a half years in bankruptcy, Lehman’s is emerging in March 2012 and beginning to repay creditors in April.
4. A concerted effort to do what’s right goes a long way toward fixing past mistakes.