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Barclays ‘fat-finger trade’: how a typo wiped £3billion from banking giant

Simon English
·5 min read
<p>Robots vs humans in the City</p> (PA Wire)

Robots vs humans in the City

(PA Wire)

ABOUT 11 years ago a Citydealer called Steve Perkins bet $520 million on the oil price in the middle of the night after a four-day drinking binge that began with a weekend of golf.

He was so smashed that he blanked out after the final, calamitous trade, later admitting to regulators that he had no idea what he was doing.

Banning him from the City, watchdogs noted that Mr Perkins “poses an extreme risk to the market when drunk”.

A colleague at the time asked: How come if I want to change a £50 note at Starbucks they have to get the manager, but this guy can trade half a billion dollars worth of oil and no-one notices till the next day?

It was a fair question.

Memories of Mr Perkins (his present employment status is not known) returned this week when shares in Barclays suddenly lurched by 10%, knocking £3 billion from the bank’s market value.

No one knew why.

Was Steve back?

Onlookers were quick to dub the Barclays move a “fat-fingered trade”. “Someone was in the pub last night,” one trader told The Times.

What is a fat-finger trade?

In City mythology, they occur when a careless, possibly worse-for-wear trader types in more noughts than he meant to. Suddenly, he is selling 500,000 shares in Barclays rather than 50,000.

More prosaically, they just filled their order book in wrongly (drink may not have been involved).

In old fashioned trading over the phone that could also happen, generally in the melee of a trading session with people mixing up which asset they were buying or selling. Perhaps that is more understandable given how frenetic it can be on the floor.

Interestingly, with regard to the Barclays trade, two blocks of 48,000 shares are not particularly significant given the size of the company, so the reaction may have been caused because there were no offers on the other side of the trade given it was very early in the morning.

In theory, the trading houses own computers are supposed to twig that something untoward has happened and query it, then fix it.

What seems to happen more usually is that rivals’ computers see that something is up – a crisis at Barclays? – and make the same trade themselves, exacerbating the situation. They jump on the problem, rather than ironing it out.

Before humans have even moved, the ‘bots have taken over. If you find that a concerning harbinger for what might happen in the rest of our lives, that’s reasonable.

Sometimes the City is just funny. It hires hundreds of risk management experts and likes to insist that the old days of rogue trading simply couldn’t happen now.

Then stuff the risk experts missed happens – all the time – and the rest of us realise they are making it up as they go along.

Circuit breakers – a halt in trading in the affected share – ought to be a partial solution.

Circuit breakers were first introduced in the US following the Black Monday stock market crash in 1987 as a means of managing extreme volatility and preserving orderly trading.

Not all circuit breakers work the same way. In the US, market-wide circuit breakers enforce a trading pause in all stocks for 15 minutes.

The London Stock Exchange says, grandly, that its “price monitoring functionality is constantly evolving to respond to clients’ changing needs” and that “it employs a security-by-security price monitoring mechanism”.

That must have been great comfort to Barclays last week, watching its shares spiral downwards for no known good reason.

Russ Mould at AJ Bell picks up the Barclays tale: “Fat finger trades tend to stand out because they are pretty rare, although you would expect them to be a much rarer in a world where algorithm-driven trading dominates and machines are much more powerful in terms of flow generation than humans.

“In this case, the volumes involved were apparently small – reportedly 40,000 shares at 168p (according to Bloomberg) on a day when 1.4 billion shares went through the LSE’s order books right across the UK market (so three thousandths of one per cent of the total daily share volume), with presumably more going via dark pools.

I guess we can see how this one happened. Barclays was trading at 186p at the time and the rogue trade reportedly took place at 168p – we’re all capable of typos like that (alas).”

Barclays has maintained a dignified silence as it is in a close period ahead of its first quarter results on 30 April, but internally the mood can’t have been good.

Who lost from this trade in the end? Well, we may never know.

If the amount is big enough, some investment banks will be forced to reveal “unauthorised losses” from some rogue trades, though they won’t reveal that it was the Barclays deals that caused the trouble.

Of course, we only ever hear about unauthorised losses, never unauthorised, ie accidental, profits.

Then again, in the City, as the saying goes, all losses are unauthorised.

Competition for the worst fat fingers ever is tough, but we will go with this from 2014 in Japan, when one trader, again in the middle of the night, tried to buy 2 billion shares in Toyota, about 55% of the whole company.

He tried similar deals for Honda, Nomura and other giants. Sadly, the trades were cancelled, else the cost to the broker would have been an amusing $711 billion.

The good news for traders with out-of-control fingers is that nail bars are now open again so they can at least have their wayward talons shorn.

Maybe that is the end of the fat fingered trade. For now.

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