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"Fat finger" role in selloff likely a myth
May 7, 2010 / 10:52 PM / 8 years ago

"Fat finger" role in selloff likely a myth

* Dealers, investors have safeguards against “fat fingers”

* Trading systems require special approval for big trades

* If fat finger doesn’t exist then adds to selloff concern

By Dan Wilchins

NEW YORK, May 7 (Reuters) - The “fat finger” that supposedly triggered a scary U.S. market selloff on Thursday is likely just a myth.

Soon after the Dow Jones Industrial Average lost 6 percent in 10 minutes, rumors abounded that a trader had sparked the rout by erroneously inputing a massive “sell” order -- a mistake known as a “fat finger.”

But the rumors either lacked specifics or when the name of a firm was mentioned there was no trace of the “fat fingered” individual.

And according to people who have programmed trading systems for investors and dealers, such a huge error is unlikely because of an increasing safeguards introduced in recent years to prevent erroneous large orders.

The lack of a human cause bolstered the case for Thursday’s selloff having been triggered by either the flawed structure of the market or an automated trading program gone awry, sending fingers pointing at computers as much as a mistake by a single human. [ID:nN07262602]

“If you make a major mistake, you could destroy all your capital,” said Lawrence Harris, a finance professor at USC Marshall School of Business. “The security of the firm depends on the fidelity of these systems,” he added.

“I view it as unlikely that this was a fat finger story,” said Harris.

Initially, the rumors focused on Citigroup (C.N). At first, the bank said it was investigating the rumor that it made an erroneous trade and then on Friday morning it declared there was no basis for such speculation.

“Based on our review, rumors about a trading error by Citi are unfounded. It is troubling that inaccurate and unfounded rumors were spread as far as they were,” Citi spokeswoman Shannon Bell said in an email.

The rumors about what happened on Thursday varied, but typically involved a trader selling $16 billion of a futures contract or exchange-traded fund, when he or she meant to sell $16 million.

But a big enough trade often requires the approval of a trading desk head, and an astoundingly large trade typically requires a department head, traders said.

Even if a money management firm did mistakenly put in a large order, the dealer or the exchange often have systems to prevent it, they said.

One trader said that after talking to his peers across Wall Street, he finds the fat finger hypothesis implausible.

“It just doesn’t make sense,” he said, adding he heard enough different variations on the rumor to discredit all of them.

But fat fingers have created problems for banks in the past. In 2001, UBS mistakenly sold 610,000 shares of Japanese advertising giant Dentsu Inc at 16 yen per share, instead of selling 16 shares at 610,000 yen. In 1992, Salomon Brothers botched a customer order and shaved 15 points off the Dow Jones industrial average.

One tantalizing possibility -- if a trader really did put in a massive sell order that triggered a broad decline, he or she could have potentially bought back the shares or futures in question at a tidy profit as the market plummeted. (Reporting by Dan Wilchins; Editing by Tim Dobbyn)

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