the fat finger of all fat fingers!

2 mins. to read

Just over a week ago, the Asian world woke up to a shock when someone attempted to make a single trade worth 67.78 trillion yen (£370 billion). Thats right £370 BILLION! It seems a Japanese broker inserted an order to buy a total of 42 Japanese equities whose value was equivalent to the entire Swedish economy. Fortunately, however, the same fat finger that idly thumbed some excess numbers was able to correct the error just in time to avoid the worst.

If the trade had gone ahead, it would have been the largest trade ever in Toyota Motors, being an attempt to trade 1.96 billion shares in the company, worth around 12.7 trillion yen and corresponding to more than half of the companys shares outstanding. I wonder how much Toyota shares would have reacted on such an order!

This kind of error is not new. In 2012 Knight Capital lost $450 million (£278 million) after the company’s computer seemingly went AWOL and traded several shares erroneously, in the process causing a temporary panic in New York. In the end Knight Capital was sold directly as a consequence of this error.

According to traders in Japan, similar errors do occur sometimes, but never on such a magnitude. This was the biggest error ever in the Japanese market and could have ended very badly, were it not for the cancellation of the trade.

Over the last few years, there have been plenty of discussions on the topic of trying to understand why these errors occur and how to prevent them. With electronic trading completely replacing the classical open outcry, it seems that it is just a matter of a few clicks before one can buy the entire Swedish economy. But, while markets often reverse the losses due to errors, there is a transfer of wealth during the operation, as investors that are highly leveraged often see their positions automatically closed without having the chance to recover with the subsequent market correction. Something to be aware of when spread betting in particular.

Whether such episodes are the result of distracted and exhausted traders or purposely generated is open to debate. But one thing makes me scratch my head: How the hell can someone make a trade equivalent to the entire Swedish economy? How is that possible in the first place? Isnt it possible to set a privileges system imposing trading limits?

On the other hand, and given the dimension of the order, it could have been placed by some major institution, perhaps the BoJ. Abenomics singular aim is the reflation of the Japanese economy at all costs, and I’m sure that its founder would allow the BoJ to buy the entire Japanese equity market if necessary!

Perhaps the background to this is also why we hear stories of very successful traders that come from the gaming world. Long gone are the days when the best traders had some kind of economics skills (never mind a degree). They are now just overgrown kids that were once successful playing “Call of Duty”, endowed with very fast fingers and smart enough to follow the trend it seems! That’s why the mysterious Japanese trader nicknamed “CIS” in remembrance of his gaming days turned himself into a 16 billion yen day trader! After all “the trend is your friend”, particularly when the equity market is turned into a centrally planned playground where central banks give you the cheat codes to play it successfully.

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