After Knight Capital’s catastrophic glitch in its electronic trading platform last week, there is no shortage of pundits talking about what the company should have done to prevent it.
But no one is talking about the higher-level problem. That is the fact that financial services companies are investing billions of dollars into IT and these glitches (a word that doesn’t seem to reflect just how big a disaster this $440 million pre-tax loss was) are happening all the time.
According to Celent, global IT spending by financial services institutions is expected to reach about $394 billion by 2013, up from an estimated $364 billion in 2011. Despite all this, firms still don’t have adequate means to predict or anticipate this type of volatility.
This is where case-based reasoning (CBR) shows its strength. Based on the principle that similar problems have similar solutions, CBR analyzes data patterns in real time, using past events to proactively predict future problems and the system learns as it grows. Optimizing and working in conjunction with existing tools, CBR provides lessons learned, best practices and solutions from past experiences so firms are more likely to see signs of problems before they happen – and take steps to mitigate them.
By providing a realistic assessment of whether a similar scenario is likely to occur in the future, CBR empowers users with a new level of transparency to help make better, smarter, faster business decisions – and prevent these types of volatile events from occurring or at least spot them ahead of catastrophe.
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6 Comments to "Monday Morning Quarterback – The Bigger Problem Behind the Knight Capital Debacle":
Anonymous
08 August 2012
Adding 6 sigma, CBR or any other 'process' would not stop what happened at Knight - human error lies at the base of the problem - and humans will continue to make mistakes...
klupowitz
08 August 2012
When looking at industries like life sciences, where a "glitch" in technology means people may die, you will find not only extremely detailed standard processes to control quality, you will also find tremendous regulatory scrutiny and oversight to insure those practices happen. Perhaps we need to see more standardized control and rigor as to how new features and processes are delivered into the marketplace?
Comments (1)
daryand
08 August 2012
so, by extension, did this mean that BP used CBR to "predict" and "prevent" the gulf spill?
Comments (2)
gbollenbacher
08 August 2012
The major cause of "Knightgate" was apparently their hurry to get the trade processing application into production before competitors, so they shortcut testing. In a rapidly evolving market, there will always be time pressure to get software into production. If a firm's release of improperly tested software harms only them, as appeared to be the case here, so be it. But one of these glitches will harm lots of others, and may cause the markets to freeze. I don't think the regulators are very well versed on the implications of some HFT firm putting insufficiently tested software into production. They, and we, will probably become more knowledgable when disaster strikes.
Comments (48)
philip wade
08 August 2012
To daryand: our drilling software, DrillEdge, is designed specifically to allow proactive action to be taken before situations arise such as the BP Macondo incident. Stemming from the investigation into the incident, the US Department of Energy formed an Ultra-deepwater Committee which released a report advising on some of the ways to better address drilling risks in those environments, where case-based systems were acknowledged as one of the solutions. Please refer to our blog on the topic for more information: http://blog.verdandetechnology.com/us-department-of-energy-advises-on-the-need-of-expert-case-based-systems
And you could refer directly to the Committee's report: http://fossil.energy.gov/programs/oilgas/advisorycommittees/UDAC_2012_Report_-_Final_-_03-08-12_Revi.pdf
Anonymous
10 August 2012
The real problem is management. The IT engineers only do what they are told to do. They are professionals and know how to design and test programs. Many of them are from defense and other industries where standards for product development are strictly followed. Finance is one of the few fields where people with PhDs and Masters in complex fields like engineering have to take direction from history majors.