A few years ago, most investors would not have a clue as to what a fat-finger trade was. Only folks that work directly in the stock market would more than likely know what it meant. Even now, there are probably many investors who will have no idea what a fat-finger trade actually is.
A fat-finger trade/error is a keyboard input error in the stock market or FX market whereby an order to buy or sell is placed of far greater size than intended. That is it. Sounds simple, doesn't it?
However, rarely do fat finger errors occur that cause the stock market to go nuts on the upside. Fat finger errors seem to be exclusively reserved to create a massive whoosh lower in a particular stock, usually widely held, which helps take the overall markets down as well with it.
Just yesterday, within a space of 3 seconds, shares of Amazon went from trading at $961 (rounded to the nearest whole number) to a low of $927. At $961 per share when the so-called fat finger trade happened, Amazon was already down $49 per share intra-day. Think about that for a minute.
The Nasdaq which was already down roughly 90 points just before the "fat-finger" trade hit, swooned another 100 points as, more than likely a massive amount of stop losses were triggered and investors that had set stop-limits saw theirs shares sold out from under them in a blink of an eye.
So, what does Wall Street have to gain by this new technique? Well, as most of you know, the Wall Street machine lives and breathes on trading. By creating these "events" every now and then, Wall Street gets to see trading volumes go through the roof, as most investors get trapped in the panic and end up selling out, which means more trading commissions for the firms.
On the other hand, the fat-fingered trading event could have also been set-up by a large hedge fund with a short bias that was getting killed on its short positions as the market continued to climb and decided that they would stage the fat-fingered trade in order to be able to cover their short positions as prices whooshed lower.
Regarding the specific fat-finger trade yesterday, the word is that a trader intended to sell 200 shares of Amazon and instead entered 200,000 shares which caused the markets to swoon along with the shares in Amazon. One has to be incompetent beyond belief to not realize that he/she has entered 5 zeros instead of 2 in order to make an error of that size. Go ahead, head to your pc/laptop and try it for yourself if you like. It is just not possible to enter 5 zeros instead of 2 and not know what you have done. Unless it's an "error" designed to cause the markets to get hit and hit hard.
The aftermath was that it made worse a major tech-wreck/sell-off across the board yesterday and despite the slight recovery into the close, the damage done in the trading day was intense.
The Nasdaq closed down 114 points or 1.8% to end the day at 6,208 after hitting a low of 6,138.
Amazon closed down $32 at $978 per share after hitting that fat-fingered low of $927 per share.
From a personal point of view, I had a few buys that were executed at levels that I would never have expected to get filled were it not for the fat-fingered trade creating a whoosh lower in virtually every techland stock out there or if it was an ordinary sell-off in techland.
Whether I will be thanking Wall Street for allowing me to buy at those ridiculously low levels will depend on how things shake out next week.
Of course, all the doomsday buffs, the always-short-but-never-wrong swamis and the kindly uncles will fill our ears with how this is the end of the world and that we should all head for the hills and/or hide our money in tin-cans around the house. Anything but the stock market will be the mantra all weekend long.
Now if this sounds too conspiracy theory-like to you, riddle me the following?
Why do fat-fingered trades usually only happen on the downside? Have any of you heard of Amazon or any other stock go ballistic on the upside because a "trader" entered a buy order for 200,000 shares instead of 200?
I never have.
You probably never have either.
Just something to think about isn't it?
(Long amzn, long and short options on amzn)