Market insiders blame 'fat finger failure' for unusual stock swings
Wednesday 25 August 2010
The London markets were believed to have fallen victim to "fat finger failure" yesterday, after trading in five stocks was temporarily suspended following wild swings in their pricing.
Officials at the London Stock Exchange (LSE) confirmed that its systems kicked to briefly prevent trading in BT, Hays, Next, Northumbrian Water and United Utilities after violent movement in the shares yesterday afternoon.
The swings prompted LSE officials to contact those responsible to find out the cause. A spokesman for the exchange declined to disclose names. He did say that the LSE's electronic systems had worked as they should to prevent further issues in the stocks.
While it was not immediately apparent whether the trading patterns were a simple mistake or something more sinister, insiders said at the close of the session that after looking into the cases, "it looks like the fat finger".
At one stage fear swept the trading floors that a hedge fund had imploded, possibly accounting for the sharp falls in share prices, but that talk fizzled out. One London-based trader said human error was relatively common on the markets, but usually in the smaller, more illiquid stocks.
Fat finger failure is traditionally attributed to human error, when traders input the wrong number of shares or use the wrong price to buy or sell. The term has been stretched to include glitches in the electronic trading systems prevalent across global trading floors. "It is hard to tell if fat fingers are automated or manual," one market participant said.
The two utility stocks soared, with Northumbrian up 5 per cent and United Utilities spiking by almost double. The telecoms giant BT and clothing retailer Next both shed over 8 per cent, while the recruitment company Hays was down almost a tenth. When trading resumed in the stocks, the prices returned to similar levels to before they were suspended.
While these trades are unlikely to have lost firms a significant amount, fat finger costs have run into the millions in the past. In December 2001, a UBS Warburg trader caused the bank a loss of up to $100m after attempting to sell 16 shares in Dentsu at ¥600,000, but instead selling 610,000 shares at ¥6. Four years later a 20-year-old trainee made a similar mistake when trying to input an order for stock in the Japanese telecoms company J:Com. It lost the Mizuho Securities company $224m, although some of the firms that benefited agreed to give the money back.
In 2007, a former Morgan Stanley trader cost the group $300,000 in fines when he ordered $10.8bn worth of stock instead of $10.8m.
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