January 30, 2014 / 11:46 AM / 5 years ago

'Fat finger' trade seen costly after HSBC price spike

LONDON (Reuters) - A trader may have lost about 400,000 pounds ($662,100) in under 30 seconds on Thursday after causing a 10 percent spike in the shares of Europe’s biggest bank, HSBC (HSBA.L), which traders blamed on human error - a “fat finger” trade.

The logo of HSBC bank is seen at its office in the Canary Wharf business district of London April 1, 2013. REUTERS/Chris Helgren

The jump in the price - a seismic move in a company worth nearly 120 billion pounds - prompted a “circuit-breaker” to kick in and suspend HSBC shares from trading for five minutes, after which an orderly market in its shares resumed.

The London Stock Exchange said its trading system worked as it should to prevent it sparking a panic.

An LSE spokesman said the spike, which briefly flipped the entire FTSE 100 index .FTSE into positive territory, had been investigated and no trades would be cancelled.

That would be unwelcome news for any fat-fingered trader sitting on a hefty loss.

Other traders said the person responsible may have input the wrong quantity of shares to buy or did not spread out the trade over a sufficiently long period of time for it to be absorbed by the market, and also probably failed to put in an upper price limit.

Trades are typically divided into small orders by complex algorithms to get a better price. But these program trades can trigger other algorithm orders and have been criticized for exaggerating market moves.

“These things should never happen if it’s done properly, that’s why lots of controls are built into the systems. But it may be the case that someone manually keyed in the algo and changed some of the configuration,” a trader said.

“There are various scenarios on what could have gone wrong. But the good thing is people shouldn’t do it, and so getting penalized for doing it (by losing money) means they won’t do it again,” he said.

The identity of the trader or company he or she worked for has not been revealed.

The flurry of action in HSBC shares was sparked at 1120 GMT (6.20 a.m. ET) and 17 seconds, with an order for 18,049 shares at 629.3 pence, near where the price was trading.

Hundreds more orders in smaller amounts followed and drove HSBC’s share price to 650 pence within 12 seconds, and then as high as 688 pence within another 16 seconds. The shares were then suspended until 1126 GMT.

About 1.9 million shares traded during one minute. That could have lost the trader about 400,000 pounds for his “fat finger”, based on an average price of 650 pence, though one trader said it was likely other orders were triggered by the original mistake so others may have shared that loss.

Algorithms - or what some have dubbed "the rise of the machine" - have been blamed for adding volatility and prompted exchanges and banks to increase controls, especially after a "flash crash" on Wall Street in May 2010, when the Dow .DJI fell more than 600 points in a matter of minutes, sparked by a large seller creating an imbalance in the market.

Other stocks hit by fat-finger trades include U.S. security software firm Symantec (SYMC.O) and American Electric Power (AEP.N) last year.

HSBC declined to comment on the move. By 1608 GMT its shares were back at 630.7p, up a more modest 0.7 percent on the day.

($1 = 0.6041 British pounds)

Additional reporting by Tricia Wright, Toni Vorobyova and Alistair Smout; Editing by Will Waterman

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