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Comment by nostromo | Hacker News Reader

> By the time the trades were blocked for the last time, less than an hour after they began, Goldman Sachs executed orders to sell more than 1.5 million options contracts for $1. The cause? A coder had mistakenly programmed a router to send placeholder bids as live orders. If not for the good graces of the options exchanges, the bank would have lost $500 million, according to the U.S. Securities and Exchange Commission. Cancellations and price adjustments reduced that to $38 million.

It sure does seem like there are two sets of rules on Wall Street. I doubt any small trader would be able to reduce their losses 90+% after errantly submitting a bunch of live options orders.

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There are N^2 sets of rules. At the end of the day you have two counterparties engaged in voluntary exchange. Everything is negotiable, anything is possible -- you just have to ask or pay. What people don't seem to grasp about modern finance is how mind boggingly complex and dynamic it really is. The idea that a tier one investment bank and a small trader should be held to the same "rules" is so wondrously silly... it's hard to describe but there ought to be a word for it.

The only thing really annoying here is that all this wackiness is backstopped by the Federal government. Nobody has any doubt that at the end of the day they will step in to save GS if everything really goes sideways. And that's probably a good thing. But it's very strange that the big banks, which are essentially quasi-state actors at this point, get to keep so much of their profits when the public is bearing so much of the risk.

This is the real difference between China and America: in China the government does everything in its power to make sure its state-owned enterprises succeed and then it takes its pound of flesh. In America the government does everything in its power to make sure its state-owned enterprises succeed and then it gives them a huge tax cut to make the shareholders that much richer. It's a bold move, let's see how it plays out.

> it's hard to describe but there ought to be a word for it.

The word is naive.

The Chinese government bailed out Anbang literally two days ago.

https://www.ft.com/content/c5bca040-37c6-11e8-8b98-2f31af407...

At least the chairman is on trial. Not that the trial would be fair or is for the right reasons.

>The idea that a tier one investment bank and a small trader should be held to the same "rules" is so wondrously silly... it's hard to describe but there ought to be a word for it.

Just like the idea that the aristocracy should be accountable to the same laws as commoners, right?

No but if GS asks a counterparty (with whom they have billions in other contracts) to cancel contracts as a result of a system error, the counterparty will probably agree (if they don't lose as a result) knowing that GS will next time do the same. With a small party, this could just be an attempt to undo a bad deal.

I think what the poster meant is that deals are just contracts and can be amended if both parties agree. For large banks with longstanding relationships, that is naturally much easier than for a trader that no one knows.

In its majestic equality, the law forbids rich and poor alike to sleep under bridges, beg in the streets, and steal loaves of bread.

Sorry, but rules need to scale. What is acceptable for a small trader can not always be acceptable for a massive Corp.

Your statement is backwards though. The massive corp is being granted much more leeway for acceptable behavior than that of a small trader.

Not so much leeways as "huge company has a massive amount of context to use as evidence this was out of the ordinary".

A smaller trader has proportionally less history in the market to use as a evidence something is wrong and the rollback rules should apply.

You're not contradicting the objection, you're just outlining another mechanic by which it happens.

"The New England Patriots reached ten Super Bowls, therefore the foot out of bounds just before scoring a touchdown was clearly a mistake and out of the ordinary. Therefore, award the Patriots the point, on the grounds that they usually don't make mistakes like that. And don't check the pressure in the football please, there have been ten Super Bowls where that wasn't apparently a problem…"

(I wonder who I'm insulting more, the Pats or Goldman Sachs :D )

Loving the analogy :D but (and excuse my ignorance), but in NFL those rules don't allow that, where as it appears the markets do have these mechanisms to allow it?

They do allow it, but that's precisely what people are complaining is unfair. They are literally too big to follow the same rules as the small traders.

Yes, and that's a good scaling rule. the person with $50 dollars is likely clueless and stumbling around trying to figure out what the rules are. The person with $50 billion can do serious damage when they screw up.

The rules in place are exactly backwards. the $50 dollar team is held to a high standard, with no affordances. the $50 billion dollar team is part of the club, so enforcers look the other way when they screw up.

but a $50 trade has a much smaller effect on everyone than a $50 billion trade

For instance, the effect was that Goldman lost money, while some other guys made money - what's the harm here ?

Moreover, the trade being busted, the guy that initially made the money, probably found himself in a very uncomfortable position, since chances are he already covered his risk and hedged the lucky trades. So overall, he lost money just because Goldman was able to force the rules in their favor.

Unfortunately, markets are rigged, just as most things -> the bigger you are, the more influence on the rules and how they are applied you have.

If the little guy makes a mistake Goldman will happily take the money. If they make a mistake the rules need to be changed. This simply is not right.

It is not backwards at all. Corporations are made up of a ton of people, there's no one person you can lay blame on. Some guy fucks up and costs a firm half a bil with a computer error, that's not something you want to just allow to happen.

A dude losing $50? Give me a break, his risk is his own. Consider his $50 a small price to pay for learning how things work. And let me remind you, it is a very small price.

Then they should not let that person do live trades.

He wasn’t live trading, he was a programmer, like any other dude here in HN, and he wrote something incorrectly. A bad trade went through. Is he to blame? Who knows, no one else caught his mistake and maybe he actually coded what he thought was asked for, or someone told him something wrong.

I love this. This is the ultimate wisdom of crowds hack.

Have a thousand people throw in a thousand bucks, each one selects an option play to purchase. Randomly select the purchase. If the play is profitable, keep the money. if it's a loss get the trade reverted because 'a lot of people were involved in the process.' I can make the process as convoluted an necessary to meet your 'no one person you can lay blame on' rule.

I think that's a stupid rule, because it's so easy to hack.

The more money staked on a trade, the higher the threshold should be to roll it back. More people mean more chances to catch the error, not the other way around.

edit

also, the corporation itself is the person that takes the blame. if it can't manage itself, it shouldn't manage your money.

....what? Your logic is truly frightening. Are you saying this is a regularly occurring event and that they deliberately did this? Do you have any idea of the scale and complexity and risk of the code they have deployed? This shit understandably happens. There is no "more people means mistakes don't happen" in any organization on the planet.

There is no "whether or not who should morally be able to roll back a trade". There is a "hey, we are a customer of your business, we do a lot of business together and I make you a lot of money. We had a once in a blue moon mistake in our billions of lines of code, can you help us out. Other banks are watching and there are plenty of other exchanges to do business with"

> Are you saying this is a regularly occurring event and that they deliberately did this?

Nah.

> Do you have any idea of the scale and complexity and risk of the code they have deployed?

No. But apparently neither do they.

> ... I make you a lot of money. ...

With basically every other risky thing people and corporations encounter, the response is "go buy insurance". Usually they're told that by finance guys.

But hey, good for them.

>we do a lot of business together and I make you a lot of money >Other banks are watching and there are plenty of other exchanges to do business with

And the answer to that should be "sorry, if we will roll back your trade, SEC will put us out of business on the fraud charges".

Every exchange that I’m aware of has a rule allowing them to roll back clearly erroneous transactions. “Clearly erroneous” isn’t always clearly defined, but it would obviously apply in the GS case (huge volume executed at $1).

Nothing about this is fraud.

There is a cosmological reason why you do not hold a position as a financial regulator

That pretty clearly wouldn't work. A necessary (but not sufficient) condition for breaking a trade typically involves language like "clearly erroneous". Selling an option that is trading in the $100s for $1 (the case here) is probably in this class; trading at the market and then having it move against you is completely different.

And the rules defining what is 'clearly erroneous' and what is not is intentionally made vague because arbitrage of this clause makes the exchanges money.

In what sense is this “arbitrage”?

They stand as the arbiter of who will gain money and who will lose. There basically is a series of cases 'erroring parties vs Goldman' and 'erroring Goldman vs other parties' and whether Goldman will lose money is decided by an Exchange (hint: they rule in Goldman favor every time, making an analogy with forced arbitration even more proper)

How do you know the player isn't up to something intentional, for instance triggering some kind of 'outside investors suddenly acquire all of a stock or bond that we think is going to tank in the next five minutes'?

Are stock market players not allowed to divest extremely suddenly, to dump their property at fire sale prices in order to get rid of it at what would be a paper loss, all the while knowing the consequences of holding would be worse?

What if they're dumping equity in a company that will be known to have committed terrorist acts? I'm not sure if I buy 'clearly erroneous'. I also don't buy that the scale of the error was really threatening to Goldman Sachs.

"Corporations are made up of a ton of people, there's no one person you can lay blame on. Some guy fucks up and costs a firm half a bil with a computer error, that's not something you want to just allow to happen."

That's exactly how the big corporations hold the whole country hostage. When they do things well they get to keep all the profits and distribute them but when things go bad it's suddenly nobody's fault and the rules have to be changed. Since 2008 I am of the strong opinion that if someone in a corporation makes a big mistake we should let them go under without hesitation. Otherwise they can always blackmail us into being bailed out or working under a different set of rules if they make a mistake.

well if you let them fuck up they would learn how to scale their processes real fast but then we start taking about too big to fail

The way to win every bet is to be too big to fail.

If your corporation is operating in a way that one person's mistake can cause you to lose $500 million, that is your own damn fault.

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