Computers are playing an ever greater role at companies that trade equities, commodities, and derivatives, notably in relation to order management. Many trading firms apply automated strategies, including high-frequency trading (HFT). Even firms that make trading decisions without computer involvement often rely on computerized order-management systems (OMS) to achieve optimal execution.
Whether developed in-house at trading firms or purchased from independent software vendors, automated trading algorithms, OMS programs, and all such software bring along the risk of errors. On the one hand, this can involve software behaving in unintended ways because of bugs in the code. For example, a coding error at the BATS exchange reportedly blocked trading on March 23, 2012 in all symbols from A through BFZZZincluding BATS itself, which was attempting its IPO that day. On the other hand, errors (or more technically “anomalies”) can result from software behaving as intended but generating poor results in unexpected environments. For instance, a large S&P E-Mini order triggered a cascade of interactions among automated trading systems, each apparently operating as intended, that resulted in the “Flash Crash” of May 6, 2010, in which the Dow Jones Industrial Average dropped 600 points in just five minutes before recovering.
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