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Major fat fingers and flash crashes

Jul 18 2017
Jonathan Smith

In the light of the more recent flash crashes of the silver and gold, the ethereum and the major plunge of the GBP in the autumn of 2016, we decided to have a look at the flash crashes from recent years, caused by random “fat fingers”, or by deliberate actions. Some had a major impact on the markets, while others were plain stupid.


Deliberate and impactful


The great flash crash of 2010

It took regulators quite a while to figure out what caused the flash crash of May 6, 2010, when the  Dow Jones Industrial Average fell by approximately 600 points in a five-minute span. The ensuing panic wiped out about $1 trillion from the collective value of US stocks, but they regained their value.


Initially it was thought that it was a mere “fat finger” mistake, but an investigation that took years, eventually led to British trader Navinder Sarao. He was accused of wire fraud and spoofing. Allegedly he caused the flash crash by manipulating the market for E-Mini S&P 500 futures contracts, or "E-Minis," on the CME. He made tens of millions of dollars by manipulating the markets through a trading algorithm he programmed himself.


In fact, some claim that the big flash crash of May 2010 was the start of Sarao's spoofing career, which continued for years. Others contest the significance of his role in the flash crash.


In April 2015, nearly five years after the incident, the U.S. Department of Justice laid "22 criminal counts, including fraud and market manipulation" against Sarao that carried a maximum sentence of 380 years. In the autumn of 2016 Sarao pleaded guilty and was extradited to the US, but has not been sentenced as of the summer of 2017.



The Swiss franc drama of January 15, 2015

The decision of the Swiss National Bank (SNB) to unpeg the Swiss franc from the euro, without any warning and the flash crash that caused the EUR/CHF to drop 40% in seconds resulted in total chaos on the markets.


Unlike other crashes, this one had a very significant impact on the forex industry itself. The ensuing havoc caused a large number of client accounts go into a negative balance. This cost many forex brokers millions of dollars. As a result Alpari UK closed down, after the currency market move "caused by the SNB's unexpected policy reversal of capping the Swiss franc against the euro has resulted in exceptional volatility and extreme lack of liquidity." The major forex broker FXCM got into such deep trouble, that had to urgently borrow $300 million from the investment firm Leucadia National Corp. It still has not repaid the loan in full.


The Swiss franc drama caused losses not only to forex traders and brokers, but to major banks too. According to reports, UK's Barclay's has lost millions, while the SNB reported a H1 2015 loss of 50 billion francs.



Fat fingers or bad circumstances


The GBP Flash crash


The 9% dive of the GBP against the US Dollar in October 2016 was caused by a combination of factors. The official report on the crash that happened in the Asian markets trading hours found that it was the result of a combination of inexperienced traders, algorithmic trading and complex trading positions.


According to the Bank for International Settlements, another factor that contributed to the crash was the woozy position of the GBP in the months following the Brexit vote. Even though other factors such as “fat finger” errors and potential market abuse could not be ruled out, there was not enough hard data to support the claims.



"Mr Perkins poses an extreme risk to the market when drunk"


On June 29, 2009 Steve Perkins, a senior oil trader with the London-based PVM Oil Futures, traded 7 million barrels of oil, worth approximately US$520 million, in a drunken blackout after a weekend binge. His actions drove the oil price to an eight-month high and cost PVM Oil Futures a loss of $10 million.


An investigation found that Perkins, who was a broker in Brent crude on the international commodities futures market, ICE, which meant he was only supposed to execute trades on behalf of clients, traded on his own laptop for hours through the night. Meanwhile, he had sent his employer a notice that he was not able to come to work because a relative was unwell.


When confronted, Perkins initially said he was trading on behalf of a client, but when he failed to put his employer in touch with the client, he eventually admitted he was drunk. He was promptly fired. The Financial Conduct Authority (then still FSA) fined Perkins £72,000 and banned him from trading for five years, noting that "Mr Perkins poses an extreme risk to the market when drunk".


Perkins joined an alcoholics rehabilitation program and a year later was hired by the Swiss company Starsupply Renewables. In a statement the company said he was a "good man who did a stupid thing".



Japanese fat finger


On October 1, 2014, an unidentified Japanese dealer mistakenly placed an order worth $600 billion on huge volumes of shares in blue-chip stocks such as Toyota Motors, Honda and Nomura. The biggest order was for 1.96 billion shares of Toyota Motors for 12.68 trillion yen. Fortunately, the mistake was swiftly fixed and did not cause turmoil on the markets. Nor it affected the company that had mistakenly placed the orders.


Knight Capital Group


Not so lucky was the financial services firm Knight Capital Group, when on August 1, 2012 a newly installed automated trading software sent millions of buy and sell orders, resulting in 4 million executions in 154 stocks for more than 397 million shares in approximately 45 minutes. The glitch caused major disruption on the markets. Knight Capital lost $440 million, its stocks collapsed and the company was later sold.



TAGS: flash crash  fat finger 
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