What is a fat finger, which can cause a flash crash in the markets?

(BFM Bourse) – The European indices suffered a violent drop on Monday one hour after the start of negotiations. An order entry error, commonly referred to as a “fat finger” in stock market jargon, is believed to be the cause of this wave of panic on European stock markets.

The first stock market session of May had already started badly under fears about the global economy, when the main European indices experienced a “flash crash” around 10:00 a.m. It’s the stock market equivalent of an air pocket, which ended as quickly as it started. It only took four short minutes for the earthquake to spread to the entire European financial world. The Nordic markets generally managed by OMX Nasdaq (except Oslo, now part of Euronext) were the most affected. The prize goes to the Swedish index (OMX Stockholm 30, OMXS30) with a drop of 1.16% a few moments before 10:00 a.m. turning into a drop of 7.71% a few minutes later, before the index goes all the way back up. as fast.

Eyes then immediately turned to the various European stock market operators. The latter decline all responsibility in this morning “crash” after having made the usual checks. The tracks of the technical problem and an attack in the computer systems have been ruled out. The hypothesis of human error is therefore gaining ground. Throughout the morning, investigations continued before OMX Helsinki, the Finnish stock market operator, announced the real reason for this violent drop. A human error would be at the origin of this wind of stock market panic. A market operator from the American bank Citigroup reportedly entered his order incorrectly.

The underside of a “fat finger”

This order entry error is commonly referred to in stock market jargon as “fat finger”. It can cause a snowball effect on a particular security or even an index, because the variation in prices can trigger automatic orders (to sell or to buy) and automatic trading algorithms tend to amplify this kind of movements.

How to explain such slippages? To simplify their daily lives, traders use keyboard shortcuts allowing them to enter four zeros instead of one, for example. In a flash, an order of a few thousand euros can therefore turn into a large purchase of several million or even billion euros. An order denominated in euros can also suddenly turn into yen on a moment of inattention. Last month, Barclays shares, for example, fell nearly 10% after selling 48,000 shares. The bank’s market capitalization shrunk by 3 billion pounds, or more than 3.5 billion euros, after a digital skid.

A little further in the annals of the stock market, we can cite the blunder of an employee of Samsung Securities, in Seoul, in April 2018. Instead of paying each employee of the company a bonus of 1,000 won (0.76 euro ), the accountant had paid, to all, 1,000 shares of the company, distributing the equivalent of 85 billion euros of non-existent shares. 16 very reactive employees had then resold these undue titles for a total of 150 million euros.

Closer to home, the latest case of fat finger recorded on the Paris Stock Exchange concerns LVMH. In March 2019, the title of the French luxury giant had fallen almost 9% less than ten minutes after the opening for an unexplained reason. The “fat finger” thesis was found to be credible.

And when it’s not the human who is in question, it’s the machines that take over. In 2012, the Knight Capital investment fund had come close to bankruptcy due to a computer bug in its automated trading software. The new material in question had sent anarchic orders on more than 140 securities on Wall Street causing the loss of 440 million dollars for the broker.

Safeguards not always activated

If this “slipping finger” makes you smile, it can have serious consequences despite the safeguards put in place by stock market operators to contain violent market movements. In France, for example, the stock market operator (Euronext) like the Financial Markets Authority (AMF) can each decide to suspend a security (or even the CAC 40 index) from trading, under certain conditions, as recalled by the site of the AMF. But these safeguards are not necessarily activated.

As for Monday’s episode, aggrieved investors won’t have a chance to turn against the Nasdaq Nordic. The Nordic stock market operator indicated that he had no reason to cancel the transactions carried out during this violent drop in the indices.

Sabrina Sadgui

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