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December 2, 2013

Kill Switches Coming

By By Phil Albinus and Peter Chapman

Verdande Technology, a Norwegian vendor that provides risk monitoring systems to the oil and gas industry, is writing software for brokers to monitor their trading systems.

In the wake of the trading mishaps suffered by KCG Holdings and Goldman Sachs in the past two years, brokerages are beginning to demand "kill switches" and monitoring technology by brokerages, said David Lauer, a former trader at hedge fund Citadel and a consultant to Verdande. Lauer would not divulge the names of the vendor's prospects, but said the firm has "active partners" as well as "active proofs of concept in a few production deployments." The consultant expects the firm to be ready with a product in the first quarter of next year.

Using the same predictive data that foresees blowouts of oil pipes, Verdande believes it can help trading firms predict and react to future trading glitches. In oil and gas, Verdande built a predictive monitoring system using technology called case-based reasoning, Lauer said. That's a machine-learning technique based on the notion that the past is a reasonable predictor of the future, he explained.

"You need expertise, domain knowledge and context to have the most useful predictive abilities," Lauer said. "When you get to a state you have seen before, you have context around that state. In oil and gas, if there is about to be a blowout in the pipe, you know this, for example, because you have seen that the torque is at a certain level and the pressure is dropping, for example."

Both KCG-then known as Knight Capital Group-and Goldman experienced problems with runaway algorithms in the past two years. Knight lost more than $400 million in August 2012 because of its glitch. Goldman managed to avoid losses on its runaway options trades in August after the exchanges busted the trades.

 

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