On May 6, 2010, we learned what a "fat finger mistake" is when it drove the biggest intraday decline in the Dow Jones Industrials Index in history. The precipitous drop was reminiscent of the stock market crash of October 1987. Suppose, though, that it was not a mistake. What if terrorists infiltrate a trading team and bring down the investment grid via this means some day? So I say, we had better make sure a fat finger mistake has a fat chance of happening again.
So it seems, it is possible for one trader to make a simple mistake and swing mathematical algorithms into frenzied motion. While yesterday's stock trading action was clearly influenced by Greek riots upon the Parliament building in Athens, it was a fat finger mistake that drove traders into a blind feeding frenzy.
The story goes, a trader (maybe at Citigroup (NYSE: C)) accidentally traded billions of dollars worth of an S&P 500 futures linked contract, where his intention was to trade only millions. This led to a massive sell off in S&P 500 Index component shares, including Procter & Gamble (NYSE: PG), which is one of its largest component stocks. Like dominoes set in motion, this simple mistake, however giant, set mathematical algorithms into motion trading the same securities, similar securities and then pushing the entire market lower before traders realized there was no material catalyst behind the dive.
At one point, the Dow Jones Industrials were near a thousand points off, marking the biggest intraday decline in history. The drop from intraday high to intraday low was about 9.3%. P&G shares collapsed nearly 14% in just four minutes time. However, it was not long before investors caught wind of the fat finger mistake. Money raced to ravage an unlikely and rare profit opportunity, and by the close of trading, the Dow was only off by 3.2%. Many of the trades in stocks were cancelled due to the error, but other securities losses were absorbed.
Is there a Terrorism Risk on Wall Street?
So, if a simple mistake like that can happen so easily and drive such a precipitous dive in the entire stock market, then a serious security threat seems to exist that perhaps the Department of Homeland Security needs to act to prevent. What if al-Qaeda or Iranian agents were to infiltrate a trading pit and employ a coordinated act of terrorism against US financial markets? It seems enough damage could be done either directly or to investor confidence, to drive significant capital out of stocks in such a panicked frenzy to disrupt the American economy.
We need to take such a threat as seriously as we do the risk of a hit to our electric grid. The damage to both would spur broad reaching chaos and financial destruction driven by fear, which is the main intention of terrorists. The events of May 6 have clearly illustrated for us the importance of a vigilant and water tight defense for our financial markets and system. We are clearly vulnerable now, and we should not be. This anomaly of the fat finger mistake has served notice to us, and it would be negligent now to not use the experience for the betterment of the system.
Thursday's Most Active and Most Affected
Thursday's most active stocks included Citigroup (NYSE: C), Lloyds Banking Group (NYSE: LYG), Bank of America (NYSE: BAC), Ford Motor (NYSE: F), Direxion Daily Fin'l Bear 3 (NYSE: FAZ), HSBC Holdings (NYSE: HBC), BHP Billiton (NYSE: BHP), ProShares UltraShort S&P 500 (NYSE: SDS), ProShares UltraShort Lehman 20 (NYSE: TBT), Banco Santander (NYSE: STD), Nokia (NYSE: NOK), General Electric (NYSE: GE), Rio Tinto (NYSE: RTP), BP p.l.c. (NYSE: BP), Royal Dutch Shell (NYSE: RDS-A), Direxion Daily Small Cap Bear 3 (NYSE: TZA), Direxion Daily Fin'l Bull 3 (NYSE: FAS), ProShares Ultra S&P 500 (NYSE: SSO), UBS AG (NYSE: UBS), American Int'l Group (NYSE: AIG), ABB Ltd. (NYSE: ABB), Las Vegas Sands (NYSE: LVS), Goldman Sachs (NYSE: GS), Radian Group (NYSE: RDN), Statoil (NYSE: STO), PowerShares ETF Nasdaq (Nasdaq: QQQQ), LM Ericsson (Nasdaq: ERIC), Apple (Nasdaq: AAPL), ImmunoGen (Nasdaq: IMGN), Intel (Nasdaq: INTC), Vodafone (NYSE: VOD), Huntington Bancshares (Nasdaq: HBAN), InterMune (Nasdaq: ITMN), ARM Holdings (Nasdaq: ARMH), E*Trade Fin'l (Nasdaq: ETFC), Palm (Nasdaq: PALM), Randgold Resources (Nasdaq: GOLD), Trico Marine (Nasdaq: TRMA), American Capital (Nasdaq: ACAS), Sequenom (Nasdaq: SQNM), Microsoft (Nasdaq: MSFT), Melco Crown (Nasdaq: MPEL), SanDisk (Nasdaq: SNDK), Cisco Systems (Nasdaq: CSCO), Logitech (Nasdaq: LOGI), Shire plc (Nasdaq: SHPGY), News Corp. (Nasdaq: NWSA), AgFeed (Nasdaq: FEED), Oclaro (Nasdaq: OCLRD), Google (Nasdaq: GOOG), Vanguard Int'l Equity 1 (AMEX: VWO), Oil Services Holdings (AMEX: OIH), Great Basin Gold (AMEX: GBG), Market Vectors Gold Miners (AMEX: GDX), Adeona Pharma (AMEX: AEN), Uranium Energy (AMEX: UEC), British American Tobacco (AMEX: BTI), Vanguard Index Trust T (AMEX: VTI), New Gold (AMEX: NGD), Golden Star Resources (AMEX: GSS), Tanzanian Royalty Exploration (AMEX: TRE), Seabridge Gold (AMEX: SA) and Cohen & Co. (AMEX: COHN).
Disclosure: No Positions