The Fat Finger Revisited
May 9, 2010
Posted by Jody Eisenman | Filed under Uncategorized
After Thursdays’ trading debacle, the regulators are continuing to investigate just what caused the mysterious market sell off. As such, they have decided to cancel all trades that were executed 60% away from the market. In spite of this, there seems to be no consensus on what exactly caused this mysterious drop. My own thoughts on this are as follows:
1. I don’t believe the “fat finger” theory. Every firm that I know of, including my own, has trading limits in place. No one can enter an order over a certain amount in order to prevent one trade putting a firm out of business. It is inconceivable to me that Citi (where this trade supposedly originated) did not have the same limitations in place. In addition, the firm denies this ever happened.
2. As for the rumor that a large hedge fund was being liquidated, I don’t buy this either. No sophisticated investment firm would dump all their positions in a market order this way.
So what really happened? It’s my belief that the trading technology of the NYSE failed. The orders kept coming, but the system showed no bids to receive them. As such, some of these trades were executed at ridiculous prices. Why don’t they admit it? I think that they don’t wish to admit that this could happen, as this can really spook investors. Investors are already shaken up, and this would just make it worse.
As expected, Friday was chaotic, with the market swinging back and forth all day. At the close, we fell an additional 140 points, which wiped out all gains for the year. The VIX volatility index soared to over 40, which is more than a double from where we closed on Monday. Quite a week!
Right now, all eyes turn to Europe, as the EU debates on whether to approve the Greek bailout. I believe it will finally get done, (which could lead to a bounce) but the volatility in the markets may continue for some time.
