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

(BFM Bourse) – European indices fell sharply on Monday, an hour after negotiations began. The order entry error, commonly referred to as “fat finger” in stock market jargon, is believed to be the cause of this panic wave in European stock markets.

The first session of the stock market in May had already started poorly amid concerns about the global economy, when the major European indices had a “quick crash” around 10:00 AM. It’s the equivalent of an air pocket in the stock market, which ended as fast as it started. It only took four minutes for the earthquake to spread to the entire European financial world. Nordic markets generally managed by OMX Nasdaq (with the exception of Oslo, which is now part of Euronext) have been hardest hit. The prize goes to the Swedish Index (OMX Stockholm 30, OMXS30) with a drop of 1.16% just moments before 10:00 and turning into a drop of 7.71% a few minutes later, before the index rose all the way up. quickly.

Then eyes immediately turned to the various European stock exchange operators. The latter dismisses all responsibility for the “breakdown” this morning after having done the usual checkups. Technical problem and attack paths in computer systems have been excluded. Thus, the hypothesis of human error is gaining ground. All morning, investigations continued before OMX Helsinki, the operator of the Finnish stock market, announced the real cause of this violent drop. Human error may be causing the panic winds in the stock market. A market operator from US bank Citigroup reportedly entered his order incorrectly.

The underside of the “fat finger”

This order entry error is referred to in stock market jargon as “fat finger”. It can cause a snowball effect on a particular security or even an index, because price discrepancies can lead to automatic orders (to buy or sell) and automated trading algorithms tend to amplify this type of movement.

How do we explain such interruptions? To simplify their daily lives, traders use keyboard shortcuts that allow them to enter four zeros instead of one, for example. And quickly, an order worth a few thousand euros can turn into a large purchase amounting to several million or even billions of euros. An order denominated in EUR can also suddenly convert to yen in a moment of inattention. Last month, Barclays shares, for example, fell about 10% after selling 48,000 shares. The bank’s market capitalization shrank by 3 billion pounds, or more than 3.5 billion euros, after the digital slip.

A little further in the stock market records, we can cite the mistake of a Samsung Securities employee, in Seoul, in April 2018. Instead of paying a bonus of 1,000 won (0.76 euros) to each employee of the company, the accountant paid a total of 1,000 shares in The company, distributed the equivalent of 85 billion euros of non-existent shares. 16 highly engaged employees then resold these undeserved titles for a total sum of €150 million.

Closer to home, the most recent case of fat finger infection reported on the Paris Stock Exchange is related to LVMH. In March 2019, the French luxury giant’s title fell by nearly 9% less than ten minutes after the opening for an unexplained reason. The “fat finger” thesis was found to be credible.

And when humans aren’t involved, it’s machines that take charge. In 2012, investment fund Knight Capital approached bankruptcy due to a computer error in its automated trading software. The new substance in question had sent chaotic orders on more than 140 stocks to Wall Street causing a $440 million loss to the broker.

Warranties are not always activated

If this “slithering finger” makes you smile, it could have serious consequences despite the precautionary measures put in place by stock exchange operators to contain violent market moves. In France, for example, a stock market operator (Euronext) such as the Financial Markets Authority (AMF) can each decide to suspend securities (or even the CAC 40 index) from trading, under certain conditions, as mentioned on the AMF website . But these guarantees are not necessarily enforceable.

For Monday’s episode, affected investors won’t stand a chance of flipping on the Nasdaq Nordic Index. The Nordic stock market operator indicated that it had no reason to cancel the transactions made during this violent decline in the indices.

Sabrina Sadeghi

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