Fat-Finger Freakouts Flatten Traders
There’s no error like human error, and it’s always fascinating to see a slight disparity in communication bring on a debacle. Trading in several London Stock Exchange issues was halted this week when “fat-finger” trade entry errors were blamed for throwing circuit breakers.
Trading was stopped for the stocks of BT Group, Hays, Next, Northumbrian Water, and United Utilities.
“I’m unable to comment on whether or not the trades were erroneous,” London Stock Exchange Group spokesman Patrick Humphris told Bloomberg BusinessWeek via email. “They were triggered by some particular orders which some U.K. media have termed ‘fat-finger trades.’”
Investors and regulators alike dread the ramifications of a typo in the trade entry process, which has come to invoke appellations such as “fat finger,” or “Lobster Boy,” the latter a nod to Ectrodactyly victim and freak show exhibit Grady Stiles.
(Ectrodactyly involves the fusion of fingers into lobsteresque appendages, a handicap that did not hinder Stiles from allegedly murdering his daughter’s fiance in 1978.)
A nonsensical order creates havoc for exchanges and humiliation for institutional players, whether they placed the order or got their faces ripped off as a result. But for individual prop traders, a slip of the finger can lead to complete financial destruction. Even a large order entered by a single person would probably not trip a breaker — or bring mercy from the entity that took the other side of the trade.
Trade entry errors are not limited to the digits themselves. An erroneous “sell short” order, for instance, exposes the seller to a theoretically unlimited loss.
Food for thought in the fat-finger department has quite a colorful history to serve as admonishment for those who regularly entrust their financial future to the keyboard.
A botched trade is one of the suspects in this year’s May 6 Flash Crash, though explaining that event is currently competing with “The X-Files” in terms of dubious scenarios contrived in the absence of necessary facts.
A few months before that happened, a non-human algorithmic trading error mated with human error to jack up the prices of oil by a buck, according to Reuters. A new trading system implemented by Infinium Capital Management went awry and caused the jump, and Reuters says a subsequent $5 drop may also have been a result.
The algorithm was turned on at 2:26:28 p.m. (Eastern) on Feb. 3, less than four minutes before NYMEX closed floor trading and settled oil prices. It immediately started uncontrollably buying oil futures, according to the documents, which include letters from Infinium’s lawyer to the regulation unit of CME Group, and cite notes from a company developer.
Infinium placed 2,000 to 3,000 orders per second before its flooded order router “choked” and was “dead in the water” a few seconds later, the developer’s notes said. The algorithm was shut down five seconds after it was turned on.
Fat fingers in 2004 caused Morgan Stanley to enter a $10.8 million order as $10.8 billion. The cost to Morgan Stanley: a $300,000 fine in 2007. Cost to market players: priceless!
In a 2001 incident, traders in Japan mangled an order to sell 16 shares of advertising giant Dentsu at 610,000 yen. They got all turned around and sold 610,00 shares 16 yen. Doh!
Another debacle in Japan caused a $225 million loss for Mizuho Securities in 2005, when someone entered an order to sell J-Com at 1 yen, when the price was supposed to be over 600,000 yen. And—double doh!—they sold over 40 times as many shares as they were supposed to.
And it’s not always securities. In the days of the dot-com deluge, a sales assistant at a West Coast-based investment bank accidentally took a federal funds wire order denominated in Thai baht and entered it in dollars, inadvertently sending a couple of million dollars to much. And to the wrong offshore account whose shady owners did not send it back.
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