A rogue algorithm will cost a financial institution a billion dollars or more in 2012, says a newly released report by Progress Software.
The software provider has announced capital markets predictions for 2012 according to which a rogue algorithm will go into an infinite loop, which cannot be shut down.
"Although financial institutions have tightened risk processes to prevent human fraud, particularly after the UBS scandal this year, they are still not adequately monitoring their algorithmic trading," said Dr. John Bates, Chief Technology Officer, Progress Software. "All it takes is one rogue algo to go into an infinite loop and the results could be disastrous."
In 2012, over-zealous regulations are forecasted to handicap high frequency trading as financial services firms are not proactive in managing risk. Bates notes that regulators will go too far and try to strangle high-frequency trading (HFT) in preventing issues such as fat finger errors and flash crashes.
Progress Software notes that next year regulators in both the US and the EU will be panicked by investor and political disapproval of HFT and will rein it in with draconian rules and controls.
Countries will begin to appreciate regulatory harmonisation and banks and financial services firms will take control of internal surveillance and compliance before regulators make them do it.
The West's supremacy in financial markets will further decline as new global trading regulations favour geographies such as Russia and China.
There will be explosive growth in foreign exchange trading next year and this will create demand for complex hosted solutions. Also, regulators are searching financial fraud and market manipulation and prosecutions and punishments will increase in size and in impact next year.
"Although there are more fraud shocks to come, the good news is that financial firms and regulators are taking regulatory harmonisation seriously. One day soon we will have a global set of rules that mandate surveillance and monitoring, thereby proactively preventing fraud and flash crashes," said Bates.