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The Fat-Finger Phenomenon

11 may 2010 - News - Editor

The gut-wrenching intraday drop of 998.5 points in the Dow Jones Industrial Average on Thursday last week has raised speculation that it was due to a so-called 'fat-finger' incident in which a trader inadvertently hits the wrong keys when placing a trade on the market. Unnamed, but apparently reliable, sources have been quoted as saying that a fat-fingered trade took place on the Nasdaq exchange involving an exchange-traded fund holding shares of some of the market's most widely traded stocks.

It was further speculated that Procter and Gamble stock had been involved, based on the fact that the pharmaceutical giant's stock had dropped by over 30 percent, and then rebounded within minutes. In the May 6 debacle, the rumor was that a trader had been authorized to sell 10 million shares, but instead sold 10 billion. However, with only 2.88 billion shares outstanding, that transaction would have fallen into the realms of naked shorting, which the SEC is keeping a watchful eye on, so it would logically follow that the brokerage firm involved would have a mechanism in place to prevent this from happening. Some other short-lived, but unusual, activity on the market was the fall to one cent per share of eight S&P listings, with another increasing to more than $100,000. However, after a weekend of analysis by a team of experts, regulators dismissed the possibility of human error, focusing rather on automated trades and currency fluctuations – although the cause of what is being referred to as the '2010 Flash Crash' has not been conclusively determined.

This kind of fat-fingered typo apparently happens far more often than most are aware of, but seldom with drastic consequences. Nevertheless, most traders have a tale or two to tell about fat-finger trades that have provided some hair-raising moments. One such incident is related to the Tokyo Stock Exchange where a trader in Japan was meant to sell one single share of the newly listed J-Com for ¥610,000 and entered the trade as selling 610,000 shares for one Yen each. Even though the public listing was limited to 50,000 shares, the order was processed, with the loss incurred estimated to be around US$225,000 resulting in the resignation of the TSE head at the exchange was found to be 70 percent culpable for the error, with the brokerage carrying the balance of the blame.

 


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