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How Software Updates Are Destroying the Stock Market

Recently there has been a rash of incidents in which software that supposedly had been rigorously tested crashes and burns.
Recently there has been a rash of incidents in which software that supposedly had been rigorously tested crashes and burns. Photograph by Simon Roberts/Gallery Stock

The Knight Capital computer glitch that cost it $440 million is the latest in a series of software updates that’ve caused catastrophic mess-ups in the financial markets. In March, electronic exchange BATS had to cancel its own IPO when a previously undetected bug in its new IPO auction software reared its head at the worst possible time, this despite months of internal testing. In May, Nasdaq’s IPO software encountered a major error during the early stages of the hugely anticipated Facebook IPO. Again, like Bats, Nasdaq had performed thousands of hours of testing replicating “a hundred scenarios” aimed at anticipating problems, Nasdaq Chief Executive Robert Greifeld said.

And now this. Though Knight declined to comment, more and more market watchers believe the glitch occurred in a piece of code that Knight unveiled Wednesday morning to prepare for the New York Stock Exchange’s Retail Liquidity Program, which was also launched Wednesday morning. NYSE says it made the program’s technical specifications available for 240 days before the launch, and its testing environment was open for six months. It was up to the trading firms, such as Knight, to adjust their software. “Clearly, some wrote good software, and some wrote bad,” says Manoj Narang, founder and CEO of high-frequency trading firm Tradeworx.