Did a Citigroup Trader's Error Worsen the Market Collapse?
"What happened today was The Matrix," Mark Fisher, CEO of MBF Clearing, told CNBC, referring to the sci-fi movie where machines have taken over humanity. "When I first saw [the ticker] at 2:30, I thought a nuclear bomb went off. What you saw today is the tip of the iceberg." Fisher, of course, is referring to today's stock market plunge, which sent shares down nearly 1,000 points before they rebounded nearly 700 points.
Fisher, an expert in high-speed, electronic trading, made a rare appearance on the business news channel to sound the alarm. "Humans can't keep up," he said. "There is no way this is not going to happen again if we don't slow this down. This is a warning to everybody."
CNBC, citing multiple sources, reported that a single trader at banking giant Citigroup (C) made a human error, possibly by erroneously entering the value of a single trade. Such errors are known on Wall Street as "fat finger" trades, because the error can be a simple as a trader pressing the wrong button.
CNBC's David Faber reported that the trader entered an order for a so-called E-mini -- an S&P futures contract -- at 16 billion units when it should have been 16 million. Citigroup said it was investigating but had not immediately found evidence of such an error.
Human Error + High-Frequency Trading = Disaster
If a fat finger trade did contribute to Thursday's free-fall, it recalls a similar incident -- on a much smaller scale, of course -- that occurred on the Tokyo Stock Exchange in 2005, when a trader's typing error cost one of Japan's biggest brokerage firms $225 million and disrupted markets there.
The problem is that in this era of high-frequency, automated trading, such a single human error could have catastrophic consequences. Add fears over Europe, and you have a recipe for disaster. Gerard Cassidy, an analyst with RBC Capital Markets, toldThe Wall Street Journal that a drop of nearly 1,000 points is "people jumping out of windows" territory.
As the The Journal's Evan Newmark noted: "It's a safe bet that after the trader's initial error, high-frequency trading computers remorselessly running their algorithms took over." He added: "I'd be amazed if 'high-frequency trades' don't account for the vast majority of the executions that took place between 2:15 and 3:00 pm at the New York Stock Exchange.
Abnormal Trades at P&G, Apple and Accenture
Industrial giant Procter & Gamble (PG) saw its stock price plummet from $60 to $39 in a matter of seconds, while tech giant Apple (AAPL), which had soared north of $260, registered trades below $200, only to bounce back to $246.
"You don't see a blue-chip stock like this go down 20 points with no news," Frank Ingarra, co-portfolio manager at Hennessy Funds, told The Journal. "All of the algorithms kicked in from this errant thing."
Similarly, accounting giant Accenture, which had been trading at around $40, saw trades of one penny, yes, one penny, on one electronic market. This is not normal. Assuming a human error triggered -- or at least severely exacerbated -- the collapse, automated high-speed trades then kicked in, further contributing to the meltdown.
The New York Stock Exchange said no errors occurred there, while the Nasdaq officials were investigating "potentially erroneous transactions involving multiple securities executed between 2:40 p.m. and 3 p.m.," according to Reuters.
Procter & Gamble contacted the Securities and Exchange Commission trying to get to the bottom of the wild trades in its stock. NYSE CEO Duncan Niederauer told CNBC that some of the P&G trades "will get taken off the table."