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Monthly Archives: August 2013

This week the stock market experienced a technical glitch. A rather large one, as the market stopped for three hours. These complex systems are continuously being pushed further and further, in an industry where all parties are looking for an edge. This edge is in the 1 millisecond range and going lower. The benefit is to find fractions of pennies, lots of them. If we push the edge too far, we risk shutting the system down. This in my mind is a great example of Asymmetric risk.

Asymmetric risk – essentially, the downside is catastrophic, and the upside is incremental. Asymmetric risk means that you have reached the point where you keep chasing a small benefit and the risk is now much greater than the benefit.  In this case, perhaps the benefit is shaving a 1/10 of a penny off the price or transaction cost, or pick your benefit.  The risk is we shut down the exchange for a couple of hours if something goes wrong.  In this one case, did this glitch just wipe out all the accumulated benefit? 

You could ask Knight Capital the same question.

 

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