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mdubuque
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GAMING THE SYSTEM?

August 10th, 2004, 7:10 pm

The sort of thing described below from an article in today's Financial Times of London aggravates me to no end. Empirically, this conduct, albeit clever, resulted in less liquidity in a key market.Markets that are less liquid are less fair.What do others think?MatthewCitigroup eurozone bonds ploy leads to panic and clampdown on tradingBy Paivi Munter and Ivar SimensenPublished: August 10 2004 05:00 | Last updated: August 10 2004 05:00Trading in the eurozone government bonds market has been restricted after an unprecedented wave of selling orders by Citigroup caused panic last week.MTS, which provides the market's busiest electronic-trading platform, took the highly unusual step of limiting liquidity after the US bank 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.About half and hour later, Citigroup bought back €4bn of the paper at cheaper prices - potentially securing large profits for itself.Emanuele Caloia, head of marketing at the Italy-based MTS, said: "This has never occurred on this scale before."A group of primary dealers plans to meet today to discuss measures to prevent such huge sales happening again. Electronic trading platforms enable a trader to execute large numbers of complex trades extremely fast.The selling took place in less than two minutes and accounted for about 40 per cent of the daily average turnover on MTS.The scale and breadth of the selling caused panic as counterparties flocked to the futures market to protect themselves against falling cash market prices, leading to losses for many dealers. 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. A tick is a contract's smallest pricing move.Citigroup declined to comment, as did the UK's Financial Services Authority, which regulates the UK-based EuroMTS subsidiary running the trading platform. MTS last week took extraordinary measures to restore confidence at the expense of liquidity - normally the first priority for a trading platform. 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. MTS said the limit would remain in place at least until September, when its board would meet to discuss the market disruption.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.MTS, which declined to name the bank involved, said the controversial transactions did not breach any regulations but some dealers accused Citigroup of market manipulation and others said it was pushing the rules to the limit. 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."MTS evolved from a platform for Italian government bonds and handles more than half the turnover in eurozone government bonds. Find this article at: http://news.ft.com/cms/s/7e058608-ea6a- ... c8&ft_acl=
 
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NeroTulip
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GAMING THE SYSTEM?

August 11th, 2004, 7:01 am

What's wrong with squeezing the sitting ducks?
 
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DominicConnor
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GAMING THE SYSTEM?

August 11th, 2004, 8:35 am

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.
 
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farmer
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GAMING THE SYSTEM?

August 11th, 2004, 12:18 pm

QuoteOriginally posted by: mdubuqueresulted in less liquidity in a key market.Less liquidity? Apparently the liquidity wasn't there in the first place. All these people who said they wanted to buy didn't actually want to. That's what they get for LYING.QuoteOriginally posted by: DCFCThe systems should have coped. Fire the golf player who runs their systems, hire a techie.DCFC, I don't understand your complaint. I can't find the sentence where it says MTS malfunctioned or even ran slow.
 
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farmer
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GAMING THE SYSTEM?

August 11th, 2004, 12:28 pm

QuoteOriginally posted by: Paivi Munter and Ivar Simensenthe US bank 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.A group of primary dealers plans to meet today to discuss measures to prevent such huge sales happening again. Electronic trading platforms enable a trader to execute large numbers of complex trades extremely fast.The selling took place in less than two minutes and accounted for about 40 per cent of the daily average turnover on MTS.The scale and breadth of the selling caused panic as counterparties flocked to the futures market to protect themselves against falling cash market prices, leading to losses for many dealers.I guess next time, make that "251 instruments," or "255." Citi will just dump the restricted portion directly on the futures. Restrict that, and maybe they'll add US bond futures to the sweep. Restrict that, and they'll sweep whatever correlated basket they can piece together out of limit orders, wherever they may be.
 
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farmer
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GAMING THE SYSTEM?

August 11th, 2004, 12:38 pm

QuoteOriginally posted by: mdubuqueGAMING THE SYSTEMWhat would you call it when some 25-year-old kid writes a computer program to figure out where Citi's bid is, and bids .00001 ahead of it all day? Citi owns those rate quotes, because they own the clients who actually have firm bids, and real needs to buy. If someone is posting a spread electronically, chances are very good he's leaning on Citi. Just goes to show that CITI IS THE REAL LIQUIDITY. If these two-bit computer nerds keep leaning on Citi, then the liquidity WILL go away. Why are Citi's clients even going to post any paper at all for anyone to lean on? Without Citi's clients exposing their haves and needs to Citi dealers, the entire market is a castle in the air. These computer geeks should try running an arb market where Citi's clients use only market orders.
 
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DominicConnor
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GAMING THE SYSTEM?

August 11th, 2004, 2:23 pm

DCFC, I don't understand your complaint. I can't find the sentence where it says MTS malfunctioned or even ran slow. Ah, welcome to the workd of computer specifications. MTS did what it was told to do. The question is whether it should have been told to stop this sort of thing.You're absolutely 100% right that the smart blokes at Citi can find ways around the next set of rules. Easy ways to make money never last long.What would you call it when some 25-year-old kid writes a computer program to figure out where Citi's bid is, and bids .00001 ahead of it all day?Sadly, I'm 42, so I'm not so much a "whizz kid" as a "was kid", however, I can do entertaining things to systems. There is a variant on this approach that I've been looking at for a while on a different electronic market. Doesn't have the liqudity to work.Yet.Ironically the MTS episode may do just that.In the long run, I think we're going to see "orders" and "prices" turn into smarter objects, looking rather like small spreadsheets. Currently, they are simple tuples of price,expiry, stock, direction, and size. Some trading systems don't have expiry times in their packets (yes, really).That error alone will present opportunities.SmartQuotes will have more context, such as the prevailing turnover, volatility of price, etc.
 
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farmer
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GAMING THE SYSTEM?

August 11th, 2004, 2:51 pm

QuoteOriginally posted by: DCFCIn the long run, I think we're going to see "orders" and "prices" turn into smarter objects, looking rather like small spreadsheets.If by "the long run" you mean 7 years ago.Since this isn't something I talk about anymore, I'll just say the "molecule" is too big, the information and loci of decision making are incorrectly distributed, it does not create phenomena which lend themselves as inputs to the most robust and widespread mathematical tools, and it doesn't solve the central problem...
 
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DominicConnor
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GAMING THE SYSTEM?

August 11th, 2004, 3:06 pm

Indeed, but mainstream use of this sort of thing is still quite rare.
 
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mdubuque
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GAMING THE SYSTEM?

August 11th, 2004, 3:43 pm

Domini-An eminently readable (and at times hilarious!) response.What do you mean by "auto-price feeding" in your quote below? I think I know, but I want to be sure.Thanks again,Matthew"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.
Last edited by mdubuque on August 10th, 2004, 10:00 pm, edited 1 time in total.
 
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DominicConnor
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GAMING THE SYSTEM?

August 12th, 2004, 7:21 am

An automatic pricing takes inputs like spot rates, futures pricesand other prices and uses it to work out quotes to be put onto something like MTS or Bloomberg Bond Trader. These take the form of quotes, and most now are layered upon Internet Protocol. For anyone is has better IT than Bloomberg (IE everyone except N.Korea), there is a programming interface to send and receive this data. Real time APIs take a little getting used to, since usually they call you as much as you call them. VB/VBA can be made to do this, but you won't always enjoy the experience.To price a government bond you might take the futures prices because for some bonds they are more liquid than the instrument itself. The price model usually only gives mid prices, , so the interface to the trader has the obvious strip of bid offer spreads. Typically long dated bonds are more volatile than short ones, so the spread increases with maturity. However some long dated bonds are more liquid, which pushes spreads down again, although the net effect is usually still up.The trader may be under some obligation to limit his spreads.A well built model can frig with some of the smoothing parameters to the yield curve, and or simply bodge values that the trader thinks are "wrong".Frequently, Excel is at the hub of this, or a system with recalculaiton functionality that is similar. Thus when an underlying changes, or the trader alters a parameter, the prices get sent out. Often there will be a background task refreshing and/or pulling older prices.This requires care in coding. Computer communications are almost invariably serial, even when you're using IP and gigahertz. This means that if you as a trader want to shift your entire range of quotes, this typically hits the exchange server as a sequence of requests to change each one. In some protocols bid and offer quotes are may be separate.This means that altough the trader may perceive that he has walked along a list very quickly changing things, there is a window where they are neither what he wanted, nor consistent. An obvious one is that the bid and offer may be the wrong way round, or that there is arbitrage in the set of prices he has quoted. One issue I've dealt with was a large bank who had clearly set their spreads to zero. It was fun. Well nearly. The trader couldn't get hold of his IT people to stop it. I understand the voice mails he left with the outsourcers help desk were not ass polite as they would have liked. Moral:Never outsource IT OK, that's quotes.Trades are a tiny % of traffic on most systems. However, he we enter some CompSci stuff that really ought to be done by diagrams.The issue is confirmation. When the orders are matched the easiest method is for it to happen in the exchange system. It simply takes stuff from one, and gives it to another. It then sends messages to the parties involved. It is easy to see problems with this. What if there is high volatility, and the bank sending the price experiences a communications glitch ? What if someone does a Citibank style hit ? What if they've made an error in pricing ?THe other alternative is to have confirmations sent to the quoter when he hits. The response may be anywhere from fully manual to fully automatic. Sadly this can all to easily lead to many failed trades. It also allows unscupulous traders to put out quotes but not honour them.Also, since it is easy to get out of shit, the traders may allow their price quoting system to be a bit flaky. Exchanges and brokers hate this, since they are blamed for the trades not being honoured. Since many systems are anonymous, the middle man gets the blame, not the bad guys.
 
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mdubuque
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GAMING THE SYSTEM?

August 12th, 2004, 4:05 pm

Thanks Domini, very helpful. I never realized that the serial format could pose issues like that.Your commentary on computer quirks reminded me of a speech given by Gerald Corrigan, former director of the NY Fed.He was saying that the fact that major players have computer systems that crash and/or have compatibility issues with other money center banks and primary dealers poses some real issues for the Fed and their contingency planning.He stated that because there are hundreds of billions of dollars in contingent liability floating around the system each day (i.e. I will settle the 5 billion with you when Bank X settles with me, and Bank X is awaiting a posting from Bank Z which is late due to a computer problem) that one major crash can screw everything up in one day.One scenario they were looking at involved hardly any of the money that is due actually getting paid and all of the money center banks would be technically bankrupt on the same day!And it would have nothing to do with credit risk at all, it was just the damn computer systems, and the clowns at IT.Matthew
 
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DominicConnor
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GAMING THE SYSTEM?

August 13th, 2004, 7:51 am

He stated that because there are hundreds of billions of dollars in contingent liability floating around the system each day (i.e. I will settle the 5 billion with you when Bank X settles with me, and Bank X is awaiting a posting from Bank Z which is late due to a computer problem) that one major crash can screw everything up in one day.Actually, you don't need a computer failure for this to happen...With complex systems that multi task, or have multiple processors, you can get lock out or starvation effects.What if A is waiting for B who is waiting for C who is waiting for A ?This is easy to visualise. But of course when you have hundreds possibly thousands of distinct threads linking many entities, then visualisation fails.Variations on that theme can mean that the system "move forward" but at an amazingly slow pace. I've seen systems reduced by three orders of magnitude by combinatorial effects.There exist techniques to stop this happening, and they can cope with components that don't obey the rules. However they are expensive, and require that the core system (often called a monitor), is built from the ground up with this as a principal objectice. You also can only have ONE such system. Sure it can have a hot standby, be built of multiple sets of hardware, and if you're serious, will contain N parallel software implementations, each written in a different programming language by different people. (yes, it is done, but boy does it cost).Instead many links have evolved bilaterally and in competition. Calling it a "system" is like calling global capitalism a system. Maybe it helps you produce a vague model, but it don't give you control.Certainly banks have failed that way already, indeed the net effect of computers is that this happens less frequently. Not because computers don't screw up, but because they allow more time for people to sort things out.One scenario they were looking at involved hardly any of the money that is due actually getting paid and all of the money center banks would be technically bankrupt on the same day!Yeah, could happen. However, "bankrupt" is not quite the right term. When a bank has failed in this way before, regulators have lent the necessary money to provide them the abilty to keep on functioning. This loan is of course secured upon the entire value of the firm.In thins meltdown scenario, this approach should scale. The Fed simply grants all banks enough credit to pay each other off. This of course means that if the situation persists, the US will effectively brought all banks under state ownership.
 
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farmer
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GAMING THE SYSTEM?

August 13th, 2004, 12:46 pm

QuoteOriginally posted by: DCFCI've seen systems reduced by three orders of magnitude by combinatorial effects.Queues are generally a property of central management. When the brain has fewer moving parts than the system which it must animate, the independent parts in the system clump together into a smaller number of clumps.
 
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unquantifiable
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GAMING THE SYSTEM?

September 15th, 2004, 3:25 am

worth a laugh. the link is http://www.guardian.co.uk/business/stor ... ----MemoTo: All Global Corporate and Investment Banking employeesFrom: Tom Maheras, head of global capital markets, GCIB Subject Recent European Government Bond TradesWhat he said: In August, our European government bond trading desk executed an innovative transaction that sought to access the liquidity in the European government bond markets. This transaction, which involved large executions in various European government bonds and futures contracts, has attracted the attention of the media and regulatory authorities.What he meant: While I was on summer vacation, one of our star (albeit maverick) bond traders executed a huge and highly technical trade, which had the effect of clipping about £7m of profits from some of our best customers across Europe. The trader was too smart by half; in the process he has made a number of important clients, including a number of continental governments, look like idiots. We stand accused of bringing the markets into disrepute and - surprise, surprise - the regulators are all over us.What he said: As an industry leader, Citigroup is committed to holding itself to the highest standards in its business practices. We believe that our employees understand that, and as a matter of course, act accordingly. However, we did not meet our standards in this instance and, as a result, we regret having executed this transaction. Unfortunately, we failed to fully consider its impact on our clients, other market participants, and our regulators.What he meant: We're a big bank, with a huge reputation and we have a long way to fall. We can never be publicly seen to abuse our power.What he said: A willingness to commit capital to the markets and our clients and thinking creatively are qualities that we value in our employees and that have been important factors in our success. However, we need to be sure that in whatever we do, we fully consider the impact of our actions on our clients and the markets. We must exercise sound judgment, know our markets and our clients well and act in their best interests. This is critical to our reputation, and therefore to our ability to be successful over the long term.What he meant: Let me put that more starkly: we're a big, fat target.What he said: We strongly support liquid and transparent markets and will continue to be a major provider of capital and liquidity. We will continue to innovate and use that innovation to help our clients achieve their objectives. Most importantly, we remain committed to conducting our business in accordance with the highest standards. We need to consult and communicate regularly with each other and with our colleagues in the legal, compliance and risk organisations. If you have questions or doubts, talk to them and your manager.What he meant: We want to stay in the business of investment banking, but we can only do so if we stay on the right side of the law. And that's an individual responsibility. The law is complex, so if you don't understand it, consult someone who does.What he said: The UK's Financial Services Authority and other European regulators are investigating this transaction and we are fully cooperating. When we are able to share with you the outcome of this investigation, we will.What he meant: This affair is probably going to cost us dear - unless, of course, the regulators find they can't quite work out whether we have actually done anything wrong. On that front, we're keeping our fingers crossed.What he said: Let's continue to work together to ensure that our collective integrity, expertise, and commitment to our clients and to sound and well-functioning markets drive our every action and business decision.What he meant: So just keep your heads down.
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