Two of Europe’s largest publically traded companies experienced wild market swings of nearly 10% in less than a matter of seconds, a move that was quickly dismissed as a “fat finger” mistake but is being questioned by a High Frequency Trading (HFT) expert as a potential planned trading strategy.

Wild "Fat Finger" Price Swings In London Stocks Questioned

Price swings in London stock exchange

In London trading today, HSBC Holdings plc (NYSE:HSBC) (LON:HSBA), the large investment bank with its own proprietary trading division, rocketed 9.9% higher at approximately 11:20 a.m. in London before falling back in price minutes later, according to a report on Bloomberg.  This market activity comes two hours after the world’s largest distiller, Diageo plc (ADR) (NYSE:DEO) (LON:DGE), dropped 11% in a matter of seconds on the London exchange before rebounding five minutes later.  The moves on the European exchange triggered trading halts in the stocks and influenced the FTSE 100 (INDEXFTSE:UKX) and ISHARES STOXX 600 (EPA:SXP) stock indexes, among the biggest gauges of equity performance in Europe.

Speed of correction cited as reason to label event as “fat finger”

“Looking at the speed of the correction in the shares, it’s pretty clear that it was a fat-finger trade,” Alastair McCaig, a market analyst at IG in London, said to Bloomberg to explain both events.  This sentiment was echoed by Saul Taylor, vice president and equity trader ConvergEx Ltd in London.

Not so fast, says HFT expert Eric Hunsader, founder and CEO of Nanex, a technology company that streams US market data to primarily institutional investors. “You can’t say it’s a fat finger unless you see the data,” which isn’t necessarily available in the proper format immediately after the event.  Hunsader’s firm doesn’t monitor London markets, but if it did he would be looking for cascading order flow – continuous selling on a millisecond basis.  The reasons given by McCaig and Taylor that the event was a “fat finger” had nothing to do with continuous patterns of buying and selling but rather the speed with which the market recovered.

HFT algorithms known to engage in rapid buying and selling

Recovery speed is not necessarily a universal measure to disqualify HFT as a potential cause.  HFT algorithms are known to initiate large orders to buy or sell and then continue to swamp the market with orders in one price direction.  This is done in an attempt to influence the market making software to the point the bid / ask spread moves prices in the direction of their trade.  US exchanges have instituted circuit breakers that halt trading and disallow trades typically past a 10% price movement.  European exchanges do not have such circuit breakers in place and, to date, have not been subject to the same known level of HFT activity as US markets.

The latest iteration of U.S. HFT algorithms are known to move to a price target near these circuit breakers, down 9.9%, for instance, and once the level is reached the algorithms switch and begin to make trades in the opposite direction.  This is not only a common HFT strategy to prevent the stock from hitting circuit breakers, but also a method to profit on both price directions, up and down.  The assertion that the speed of the correction in the opposite direction is proof that the event in question was a fat finger, by itself, is at odds with current HFT strategy design.  When contacted, Taylor did not return requests for comment before press time.  Brenda Kelly, a press representative for IG, told ValueWalk: “The general consensus had been that a fat finger was to blame for the spike in price.  This has been from many different sources not just Bloomberg. Similar explanations have been given from Bloomberg.  Alastair’s comments were based off information gleaned from our trading floor.  No suggestion has been made that algos failed to make money on the move.”

Wider concerns

Hunsader notes that HFT events are on the rise since the 2008 market collapse.  Regulators at the US Commodity Futures Trading Commission, led by CFTC Commissioner Bart Chilton, have taken steps to monitor and regulate high frequency trading, particularly as manipulative trading events could lead to economic damage.  Behind the scenes, concern is that such HFT trading strategies could be initiated by enemies of the state to commit acts of terrorism or financial warfare.