Humble Pi: When Math Goes Wrong in the Real World

by Matt Parker

In August 2012 the New York Stock Exchange started a new Retail Liquidity Program, which meant that, in some situations, traders could offer stocks at slightly better prices to retail buyers. This Retail Liquidity Program received regulatory approval only a month before it went live, on August 1. Knight Capital rushed to update its existing high-frequency trading algorithms to operate in this slightly different financial environment. But during the update Knight Capital somehow broke its code. As soon as it went live, the Knight Capital software started buying stocks of 154 different companies on the New York Stock Exchange for more than it could sell them for. It was shut down within an hour, but once the dust had settled, Knight Capital had made a one-day loss of $461.1 million—roughly as much as the profit they had made over the previous two years. Details of what exactly went wrong have never been made public. One theory is that the main trading program accidentally activated some old testing code, which was never intended to make any live trades—and this matches the rumor that went around at the time that the whole mistake was because of “one line of code.” Whatever the case, an error in the algorithms had some very real real-world consequences. Knight Capital had to offload the stocks it had accidentally bought to Goldman Sachs at discount prices and was then bailed out by a group including investment bank Jefferies in exchange for 73 percent ownership of the firm. T...