"Fat finger" role in selloff likely a myth

* Dealers, investors have safeguards against “fat fingers”

* Trading systems require special approval for big trades

* If fat finger doesn’t exist then adds to selloff concern

By Dan Wilchins

NEW YORK, May 7 (BestGrowthStock) – The “fat finger” that
supposedly triggered a scary U.S. market selloff on Thursday is
likely just a myth.

Soon after the Dow Jones Industrial Average lost 6 percent
in 10 minutes, rumors abounded that a trader had sparked the
rout by erroneously inputing a massive “sell” order — a
mistake known as a “fat finger.”

But the rumors either lacked specifics or when the name of
a firm was mentioned there was no trace of the “fat fingered”
individual.

And according to people who have programmed trading systems
for investors and dealers, such a huge error is unlikely
because of an increasing safeguards introduced in recent years
to prevent erroneous large orders.

The lack of a human cause bolstered the case for Thursday’s
selloff having been triggered by either the flawed structure of
the market or an automated trading program gone awry, sending
fingers pointing at computers as much as a mistake by a single
human. [ID:nN07262602]

“If you make a major mistake, you could destroy all your
capital,” said Lawrence Harris, a finance professor at USC
Marshall School of Business. “The security of the firm depends
on the fidelity of these systems,” he added.

“I view it as unlikely that this was a fat finger story,”
said Harris.

Initially, the rumors focused on Citigroup (C.N: ). At first,
the bank said it was investigating the rumor that it made an
erroneous trade and then on Friday morning it declared there
was no basis for such speculation.

“Based on our review, rumors about a trading error by Citi
are unfounded. It is troubling that inaccurate and unfounded
rumors were spread as far as they were,” Citi spokeswoman
Shannon Bell said in an email.

The rumors about what happened on Thursday varied, but
typically involved a trader selling $16 billion of a futures
contract or exchange-traded fund, when he or she meant to sell
$16 million.

But a big enough trade often requires the approval of a
trading desk head, and an astoundingly large trade typically
requires a department head, traders said.

Even if a money management firm did mistakenly put in a
large order, the dealer or the exchange often have systems to
prevent it, they said.

One trader said that after talking to his peers across Wall
Street, he finds the fat finger hypothesis implausible.

“It just doesn’t make sense,” he said, adding he heard
enough different variations on the rumor to discredit all of
them.

But fat fingers have created problems for banks in the
past. In 2001, UBS mistakenly sold 610,000 shares of Japanese
advertising giant Dentsu Inc at 16 yen per share, instead of
selling 16 shares at 610,000 yen. In 1992, Salomon Brothers
botched a customer order and shaved 15 points off the Dow Jones
industrial average.

One tantalizing possibility — if a trader really did put
in a massive sell order that triggered a broad decline, he or
she could have potentially bought back the shares or futures in
question at a tidy profit as the market plummeted.

Money

(Reporting by Dan Wilchins; Editing by Tim Dobbyn)

“Fat finger” role in selloff likely a myth