A rare ‘flash crash’ in European stocks caused by a Citigroup trader exposes the risks of computer-initiated sell orders, magnified by a single human error.
The OMX Stockholm 30 index fell by 8pc in just five minutes on Monday, but quickly recovered most of the losses. A trader at Citi’s London desk made an error inputting a transaction, triggering a sudden sell-off in European equities, which briefly wiped out €300bn.
“The problem is not the fault itself, but all the algorithms and stops that were triggered,” said John Plasard, a director at Mirabaud. “This shows that the market is always vulnerable to human error and that algorithms and various CTAs are very much present in the market,” he said, referring to commodity trading advisors, who often use bulls to track market trends. Use systematic commands.
On Monday, there was additional pressure: a public holiday in the UK left European stock markets with about a quarter less liquidity than usual, leaving remaining trades a huge opportunity for price hikes.
Guillermo Hernandez Sampere, head of trading at Germany asset manager Manfred Piontke Vermoegensverwalt, “It was the worst day to happen.” Although the circumstances were unusual, he said the flash crash demonstrated a greater need to take action and prevent such moves in the future.
“We should not wait for the regulator to do something that will take too long – instead, brokers, banks and stock exchanges need to implement changes now, such as introducing circuit breakers,” he said.
Past sudden crashes include the pound fall in 2016, as well as Wall Street’s Black Monday in October 1987 and the Flash Crash in May 2010.
In the US, regulators have tried to prevent further shocks to share prices with new rules, including more disclosure for large traders, as well as circuit breakers to prevent stocks from moving too quickly. Let’s relax the overheated price moves and restrictions on the algorithms.
However, Europe regulates its markets mostly on a country-by-country basis.
Nasdaq Stockholm, where Monday’s crash occurred, has volatility guards for individual stocks, according to spokesman David Augustson.