We are in the position of being both liquidity providers and brokers, with our own trading platforms, so I have spent a lot of time thinking about this sort of thing.unprecedented wave of selling orders by Citigroup caused panic last week.It's their job to make money. Others have the job of looking after the market, the problem if any was that the market wasn't built properly. I do this crap for a living, I know it is hard, but I know how to stop this sort of thing, but it is ambiguous as to whether you should.MTS, which provides the market's busiest electronic-trading platform, took the highly unusual step of limiting liquidity after the US bankAfter is pretty crap. If you care about this sort of thing, you should do it during. MTS built a weak system, hardly Citibank's fault. sold a total of €11bn (£7bn) in eurozone paper on August 3, in a rapid-fire barrage of transactions stretching across about 200 debt instruments.Rapid on a human scale. When I run diagnostics on real live trading systems even the high frequency stuff looks like the tolling of a bell at a funeral. The systems should have coped. Fire the golf player who runs their systems, hire a techie.About half and hour later, Citigroup bought back €4bn of the paper at cheaper prices - potentially securing large profits for itself.Good for them. Unless people make money from a maret, there is no market.Emanuele Caloia,said: "This has never occurred on this scale before."I expect Mr. Caloia is good at golf. Maybe he wears nice suits. The fact that something hasn't happened before is no excuse for not planning for it to happen. I would bet good money that no one in MTS management has ever once looked at even a simple model where the throughput was two standard deviations from the busy scenario.A group of primary dealers plans to meet today to discuss measures to prevent such huge sales happening again. It's easy, this technology is decades old. We lifted the stuff for ours from the telecoms industry. "easy" being defined as a few expensive techies for a few months.The selling took place in less than two minutes and accounted for about 40 per cent of the daily average turnover on MTS.Lets' see 200 instruments and 120 seconds, say 3 trades per instrument 600/120 = 5 per second. Pathetically slow, I can handle this sort of shit in VB on my laptop.MTS should be ashamed.The scale and breadth of the selling caused panic as counterparties flocked to the futures market to protect themselves against falling cash market prices, Sloppy risk management and laziness meant people couldn't cope. Oh dear. Should Citibank lend them some risk manager ? As I recall one of the top contributors to Wilmott.Com is their chief risk bloke, perhaps Aaron could go and hold their little hands ?leading to losses for many dealers. Oh dear diddums. They played with the big boys and lost their lolly.Traders said the Bund futures contract on Eurex, the main hedging instrument for eurozone government bonds, fell about 20 ticks in 30 seconds compared with a typical daily move of only a few ticks.Hands up those that don't know that if a price has an average volatility of 3 or 4, a move of 20 is not that unlikely ? It limited the amount of eurozone paper a bank can trade within two minutes to either 20 per cent of the daily market turnover of the previous 10 trading days or to a maximum of €1bn.I don't speak Italian. Does it have the saying "bolting the door after the horse has escaped ?"Such safegaurds should have been in place long before. It appears that this was done on purpose. However, what if it had been an accident ? It is not that hard to screw up such that you send loads of bad orders into a system.Interal integrity checks inside MTS should have been looking for this sort of thing, because there is a non zero chance that an order matching systems goes wrong and starts generating orders itself. I have no reason to believe that Italian programmers are so superior to others that this cannot possibly happen.Citigroup's innovation left the eurozone bond market divided. Many dealers, which are obliged to provide live price quotes, protested over Citigroup's action by ceasing to supply them for two days after the incident.Where we supply quotes to other people's systems, we have hard processes to stop us being sucked dry, and on a few people's desk there is a big button with a hanged man, that kills auto price feeding. Not everyone does this. After this incident, they should review that decision, and ask the golf players why they made it in the first place.others said it was pushing the rules to the limit.Sounds good to me. You hire people to do this.A trader who wished to remain anonymous said the trading limits could undermine confidence in the system: "This may put some doubt in some people's minds about how much liquidity to provide on MTS."I never did have much confidence in MTS, the system itself, and in particular its managment have shown less than ordinary competence.MTS evolved from a platform for Italian government bonds and handles more than half the turnover in eurozone government bonds.Good point.To be fair, MTS wasn't designed to be a grown up system, but they have had time enough to fix it.
Last edited by DominicConnor
on August 10th, 2004, 10:00 pm, edited 1 time in total.