On fat fingers

May 7, 2010 in Finance

I don't believe that a trader error kicked off yesterday's crash. I do believe that computers exacerbated it. I also believe that there were transactional errors following the initial collapse. I would like to point out that when I say "computers exacerbated it," I include both HFT, algorithmic trading, and every retail investor's trailing stop-loss.

I'm ready to eat those words if the record shows me to be wrong.

But here's my evidence (besides how nonsensical it is that a single sell order could trigger that collapse):

That's a tick-by-tick of Accenture in red - banner stock of the "trading mistakes killed the market" crowd - overlaid on the S&P 500, Dow 30, and SPY. You'll notice that it hits its bottom one minute after the indices, which are actually well on their way back up when the (clearly erroneous) print occurs. If there's causality here, it involves all sorts of time travel.

But I know better than anyone that graphs with multiple vertical axes can be misleading, so here's the exact same data, normalized to be 100 at 2:30 PM:

Here you can plainly see ACN lagging the general indices... until they start to turn back up, at which point its decline steepens. Again, there's no correlation between the ACN low and the index performance.

Anyway, I don't know what sparked the selloff. I'm willing to believe it was a groupthink collapse. We saw the same thing - though much worse - almost two years ago, though we were able to find a news story which satisfied us as a catalyst in Lehman's collapse. Here, there was no news on the wire or obvious cause - but that doesn't mean it was malicious or erroneous. It just means some people (or computers) started to sell, and then others followed suit... and before you know it, the whole thing is compounded by errors on the major exchanges (but not caused!).

But come on, isn't it a little ridiculous when major news outlets believe that hitting the letter "b" sank the markets? Fat finger mistakes have happened before (disproportionately in Tokyo), but they usually result in losses for the firm that makes them, not the entire world.

Type carefully, my friends.

Leave a Comment

Previous post:

Next post: