Software risk

[campbell]

http://www.theatlantic.com/business/...is-bad/260846/

What do most people think of when they think of software? A decade ago, probably Microsoft Word and Excel. Today, it's more likely to be Gmail, Twitter, or Angry Birds. But the software that does the heavy lifting for the global economy isn't the apps on your smartphone. It's the huge, creaky applications that run Walmart's supply chain or United's reservation system or a Toyota production line.

And perhaps the most mission-critical of all mission-critical applications are the ones that underpin the securities markets where a large share of the world's wealth is locked up. Those systems have been in the news a lot recently, and not for good reasons. In March, BATS, an electronic exchange, pulled its IPO because of problems with its own trading systems. During the Facebook IPO in May, NASDAQ was unable to confirm orders for hours. The giant Swiss bank UBS lost more than $350 million that day when its systems kept re-sending buy orders, eventually adding up to 40 million shares that it would later sell at a loss. Then last week Knight Capital -- which handled 11 percent of all U. S. stock trading this year -- lost $440 million when its systems accidentally bought too much stock that it had to unload at a loss.* (Earlier this year, a bad risk management model was also fingered in JP Morgan's $N billion trading loss, where N = an ever-escalating digit.)

The underlying problem here is that most software is not very good. Writing good software is hard. There are thousands of opportunities to make mistakes. More importantly, it's difficult if not impossible to anticipate all the situations that a software program will be faced with, especially when--as was the case for both UBS and Knight--it is interacting with other software programs that are not under your control. It's difficult to test software properly if you don't know all the use cases that it's going to have to support.

SO DO YOUR DAMN SPREADSHEETS RIGHT!

This is one problem that regulation probably can't solve directly. How can you write a rule saying that companies have to write good software? The only real solution is to acknowledge that computer programs are going to fail and try to minimize the damage they can cause in advance. That could include a small trading tax to discourage high-frequency trading, or higher capital requirements to increase the odds that too-big-to-fail banks won't blow themselves up.

I'm not sure either of those would fix the issue

[Brad Gile]

Originally Posted by campbell

http://www.theatlantic.com/business/...is-bad/260846/



SO DO YOUR DAMN SPREADSHEETS RIGHT!



I'm not sure either of those would fix the issue

I agree completely. Businesses that have faulty software should be held accountable for failures. Having extra taxes or higher capital requirements are not a solution.