Monday, May 10, 2010

What a Fat Finger Is and What a Fraidy Finger Is

Much has appeared in the press lately about the fat finger error as the supposed cause the market crash last week, when the Dow dropped almost a thousand points. At the end of the day, the market was down 348, still a lot. So what is a Fat Finger, or Fat Finger Trade, or Fat Finger Error? Fat Fingers are major trading errors, and when I say major, I mean MAJOR.

There was a rumor going around that a trader was supposed to sell 10 million shares of Procter & Gamble (PG), but actually sold 10 billion shares. One version was that an B (for billion) was typed instead of an M. Another version was that the trader kept his fat finger on the zero key too long, adding an extra three zeros. This is somewhat unusual in that Procter only has 2.88 billion shares outstanding, and even if all the shares were shorted, the SEC is supposedly cracking down on naked shorting. Therefore, the trader's brokerage firm that handled the transaction should have had something in place to prevent selling more shares than were able to sell and shorting more shares than were available to borrow.

Generally, the average trader won't ever generate this type of trading error, as brokerage firms won't allow you to sell more shares than you currently own.

Of course, the drop created some outrageous activity, assuming they were not bad prints, such as the stock that dropped from $41 to 4 cents, and the stock that jumped from $29 to $100,000 a share.

My personal opinion is that the huge drop was caused by Fraidy Fingers, not Fat Fingers. Many Fraidy Finger investors were worried that Greece was going to collapse, the EU was going to be in major trouble, the collapse in Europe was going to move to the United States, etc, etc, Plus, investors and traders (the Fraidy Fingers) were watching the market drop 200 300, 400 points, and they didn't want to be the last ones out so they sold. The selling at the market kept hitting the bids, the bids started disappearing, and the market kept dropping until a few traders decided that were were great bargains around.

Now the government wants to investigate why the stock market dropped so much last Thursday, in spite of the fact that the market has practically recovered during the last couple days, all without circuit breakers. The cause of the market drop was supply and demand with a few Fraidy Fingers thrown in.


1 comment:

luvsat said...

Most brokerage firms treat PG as an easy-to-borrow stock and, hence, any sell order on PG would bypass the locate checks.