Source: Pixabay.com | Photographer: HolgersFotografie
As we witnessed in our previous article on the topic, flash crashes can sometimes be sparked by typical human flaws, such as greed or carelessness. This time around, we’ll examine 5 extra cases where the markets crashed not just under the hasty fingers of nervous traders, but also due to some serious malfunctions in the automated trading software they used. However, before we do that, we should probably briefly explain something first.
Why do these accidents keep on happening?
Nowadays, most trading venues and systems have safety procedures and systems in place aimed at preventing (or at least mitigating) the effects of fatal human errors or technical malfunctions. Most leading markets, for instance, provide traders with a time frame of 30 to 60 minutes, during which they can immediately cancel an erroneously placed order upon request.
If that doesn’t do the trick, some trading platforms also feature the so-called “circuit breakers” which, when activated, can temporarily freeze all trading operations until the whole situation is sorted out. Such systems were put in place by market regulators ever since the “Black Monday” crash of 1987 that took the markets completely off-guard.
The fact that even such measures were painfully insufficient was proven by the following flash crash of 2010—the result of the clever machinations of a single trader. Thanks to this man, today’s security systems have received a significant upgrade in order to prevent single-day declines in a more timely manner.
But no system is entirely foolproof and, sometimes, there are cases where a few troublesome orders end up slipping through the cracks and wreaking havoc. The stories below are five such real-life examples.
Case study #1: A breath away from failure
In October 2014, a Japanese broker mistakenly placed an over-the-counter order for the stocks of 42 companies totaling $167 billion. The biggest order was 1.96 billion worth of Toyota Motors shares, which comprises of roughly 57% of the company’s total available shares. The order also included stocks of other major Japanese companies, such as Nomura and Honda. Fortunately, the order was cancelled in time and did not affect the broker or the markets in any way. Now that’s what we call luck!
Case study #2: Automate this!
The US market-maker Knight Capital Group, however, did not share the same luck as its Japanese colleague. In 2012 the company, which until then was regarded as one of the largest liquidity providers on the market, decided to test new software for automated trading. Despite all the precautions, a single computer glitch led to a series of huge stock orders of hundreds of companies listed in the NYSE.
Needless to say, such a massive order made by one of the most influential companies in the sector took the markets out of their comfort zone. Worse still, the whole fiasco cost Knight Capital Group $460 million since the orders were executed at market prices and could no longer be cancelled. Unable to recover from its financial blunder, the company was eventually acquired by its then competitor Getco LLC in December 2012.
Case study #3: A game of markets
Japan is home to another “fat finger” mistake, caused by a glitch in the trading software used by the local UBS Swiss bank branch. In 2009, while trading bonds issued by the video game maker Capcom, the software made an erroneous order for the price of $31 billion. Luckily, the trade was executed outside of trading hours and the order was cancelled on the following day.
Case study #4: Who needs indices, anyway?
In 2001, a fat finger error of a Lehman Brothers dealer caused the FTSE (Financial Times Stock Exchange) index to plummet big time. The mistake? Accidental orders for shares of major companies like BP and AstraZeneca that were 100 times larger than intended. A truly ambitious undertaking that, unfortunately, did not end well—once all the orders were executed, the index shaved off nearly £30 billion of its market value!
Case study #5: A game of ping-pong
In 2013, China’s main stock index unexpectedly rose by 5.6%, while the trading volumes ballooned by 50% compared to the day before. By sunset, however, the prices rebound after an equally dramatic plunge.
The market frenzy was sparked by multiple erroneous buy orders issued by Everbright Securities, one of the country’s leading brokerages. A follow-up investigation of both Everbright Securities and its regulators revealed that the roller-coaster ride was caused by an error and not by a deliberate action on behalf of the company as was previously suspected.
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