Mystery Solved: Another Fat Thumbed Trader

Last night, I wondered if yesterday was an example of a SPUs gunner doing a late afternoon jamjab on S&P futures.

Turns out that 200 point swing was the reversing of a bulge-bracket firm trading error. The following is from a top 5 firm (rhymes with Sheryl), who plainly explains the source of the error, and how its unwind caused the reversal.

"Error at the bell last night (clarification): This error at the bell last night really did contribute to the rally.  Bottom line is that one of our competitors inadvertently sold 5346 too many of the SPX Sep 1450 calls and needed to cover them in a hurry. At the time the mkt was down  1% on the day.

In covering, it is likely the crowd front ran the order, exaggerating the move.

Once the move got going, the variance hedging phenomenon kicked in. Most dealers place MOC (Mark on Close) orders to hedge their daily delta risk.

If this theory holds, then they would have put in large sell orders yesterday MOC at around 3:40PM.  Once the mkt started to run, their delta position would’ve changed from net long to net short and they would have needed to buy that much more SPX exposure into the bell.  Our index trading desk predicts that for every 2 pt move up in the SPU, dealers needed to buy approx 500MM notional in delta.

With liquidity being lousy right now, that created the violent move."

That makes some sense to me . . .


For more color on these issues, see our prior post, Beware the Fat-Thumbed Trader!


UPDATE: August 2, 2007 11:30am

There is some disagreement amongst CME traders as to whether it was Goldman’s error or Morgan — but the basic thesis that this was an error trade getting fixed remains valid . . .

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  1. KP commented on Aug 2

    Fat fingers need lovin too.

  2. Fred commented on Aug 2

    Color me skeptical on this one. Selling was exhausted…the VIX/VXO stretched, and very crowded put holders were twitching. Spreads improved during the day, oil sported a double top, rumors weren’t having the same “fogfect”….we were ready.
    When the MOC orders were benign, CASH on the sidelines saw the window of opportunity and struck hard.

    Why a conspiracy/excuse only on the way up??

    You wont see it posted here that Corporate INSIDERS have bought more stock in the last week than any time since the eve of the Iraq War, and the start of the bull market — “the duct tape bottom”.

    Buy fear (sell greed).

  3. Bill King commented on Aug 2

    CME sources tell us that Goldman (Whooda thunk it?) started the SPU buying frenzy about 34 minutes before the NYSE close. Then Citi joined followed by Merrill and DBK.

  4. johntron commented on Aug 2

    it’s funny how the media is saying that the increased volatility is great for traders…..the flip side: the market gives you more rope to hang yourself.

  5. michael schumacher commented on Aug 2

    Sounds reasonable….and would explain some of that move. It being a mistake???? Now that’s the part I do not believe.

    Hmmm let’s see the entire world market is on the cusp of breaking down (and was down almost 3% before our day started) looked to the US market for guidance and going into the last hour all signs pointed to yet another global sell-off….only to be magically rescued by someone’s mistake in selling the wrong amount of SPX.

    Yea…I believe that……

    I have some property in New Orleans I can sell you too.


  6. Julie commented on Aug 2

    What is the source of this extremely unlikely hypothesis? Peter Schiff? He usually generates bizarre explanations.

    You usually provide a source, but not for this one. Was it generated by the same bears that started Beazer Homes rumor yesterday?

  7. SteveC commented on Aug 2

    Sorry, but we rallied right when we were supposed to. Those that watch the futures market would agree. Add the fact that odd-lot shorts (wrong way traders) are betting heavily against the market, and we have a great setup for a bounce.

  8. yc32 commented on Aug 2

    with 160m average daily spy volume and 400m traded yesterday, how much can 5346 call covering buy move the market? maybe your number is wrong

  9. AD commented on Aug 2

    “Sheryl”: Putting the income back in incompetence?

  10. Futes Trader commented on Aug 2

    I disagree somewhat —

    I saw Goldman started buying SPUs about 15:30. The call buying didn’t hit until 15 minutes after the SPU rally peaked.

    Today’s rumor from the CME is that Morgan made the 5400 error in the SPUs, not the calls. And this morning’s rally is Morgan covering.

  11. Fred commented on Aug 2

    The hysterically negative sentiment (obvious with the pasts day’s comments here) were highlighted by a doubling of the VIX/VXO. Each of the last 6 times since 1990 the market went up ~ 12.4% in the following 6 months.

    It’s not different this time.

  12. Fantasia commented on Aug 2

    Why do you have to find so weird and unrealistic, bear-like wishful thinking explanations every time a large institutional investors buys when the market is cheap?

    Merrill, Morgan and Goldman bought last night. All these firms are stupid and having fat fingers?

    Sorry, but your explanation does not hold water.


    BR: So its your position that the bulge bracket firms typically walk the SPX up 31 handles in 30 minutes?


    But don’t take my word for it, speak to someone with real pit or floor trading experience, then get back to me.

  13. IM commented on Aug 2

    So will August 1st 2007 be know in financial circles as the ‘Fat Thumbed’ bottom ?
    But seriously, this fat thumbed rumor seems like just another attempt by the bears to drive this market lower. ‘The market went up because someone made an error. ‘ The bears are pulling all the tricks out of the bag. Subprime fear ain’t working so try something else. Once the bears exhaust all their little tricks, this market is exploding higher on a frenzy of short covering.

  14. Aaron commented on Aug 2

    Is it me, or was skepticism absent when BR used the same source (CME) to note that MER was aggressively buying SPUs in the beginning of July?


    BR: Post a link showing that, or I will publish recent photos of you at a NAMBLA meeting . . .

    UPDATE: Aaron sends this linkage:
    First Trading Day of July Continues Its Streak

  15. michael schumacher commented on Aug 2


    no it’s not you I recall that too.

    Fair weather fans so to speak….


  16. Aaron Byrnes commented on Aug 2

    Any firm offering a fat finger explanation or any exchange accepting such an explanation as the basis of busting a trade should be pimp slapped.

    You’d think that with personal computers being 20+ years old that all these billion dollar firms would get around to buying some order entry software that can do little risk checking before accepting an order.

    Of course these firms DO have such software. It’s only a fat fingered trade when it goes against you. When the same trade happens to go in your direction, you are a genius… a regular Nick Leeson.

  17. Fantasia commented on Aug 2


    Did BR considered “MER was aggressively buying SPUs in the beginning of July” as an error trade?

  18. Aaron commented on Aug 2

    Fantasia – fair point.

  19. michael schumacher commented on Aug 2

    >>institutional investors buys when the market is cheap?>>

    In relation to what????


  20. shauncy commented on Aug 2

    rube-goldberg financial doggerel. this guy is trying to sound smart.

  21. Barry Ritholtz commented on Aug 2

    I wrote what I thought happened last night in this post: Wild Day on Wall Street

    The above post “Mystery Solved: Another Fat Thumbed Trader” is passing along what someone else thought.

    Some of you folks have some god-awful reading comprehension skills . . .

  22. Barry Ritholtz commented on Aug 2


    Due to incredibly inappropiate linkage, Aaron has been sent to the penalty box for an indeterminate period of time.

  23. Estragon commented on Aug 2

    Attaboy BR.

    BTW, fat fingers or not, it’s interesting that it’s (mostly) holding the gain (so far).

  24. Chris G. commented on Aug 2

    KP –

    Great point regarding corporate insiders. Did you remember how they also sold the largest amount they had ever sold since the 2000 bubble, just a few months ago? I guess that in addition to being great corporate stewards, CEO’s are also great market timers! All this despite 144 rules, registration, lockups, etc…

    I always knew you could do the cone slalom in a 18-wheel tractor trailer.

  25. Chris G. commented on Aug 2

    “Futes Trader” –

    Could you elaborate a bit on your VIX/VXO figures?


  26. Chris G. commented on Aug 2

    Sorry I just realized posters information is below their comments, not above…so my two posts are to be directed towards “Fred”, not the other two.

  27. lauteus commented on Aug 2

    Well folks, as to what it was and such…

    Whether intentional or not, it is healthy to be a skeptic. As I’m sure most can agree, unless of course, you guys don’t mind the creative accounting or backdating and who knows what 2008 will bring to light.

  28. michael schumacher commented on Aug 2

    good luck getting anything from Fred.

    he just makes statements and produces figures that only looks at his version.

    How’s that 3 day SPY trade going frederique??


  29. Fred commented on Aug 2

    Chris G…..the VXO doubled from as recent as June 21st. (13.62 to 27.25) This has happened 6-7 times since 1990…6-7 months later the market was up ~ 12.4% (average).

    There are several other “stats” that come to the same (capitulation bottom) conclusion.

    Number of new lows

    Negative breadth figures (90% days)

    Put Call ratios

    SPX RSI macd study

    New highs % below 8%

    Odd lot Short Interest

    COT commercial longs (record long)

    Massive Insider buying

    …and finally a personal observation…planted rumours move heavinly shorted stocks (e.g. BZH)

  30. Estragon commented on Aug 2

    Chris G. There are a couple of excellent pieces on the vix and correlations at David Merkel’s

  31. Fantasia commented on Aug 2

    Well BR, I’ve contacted my boyfriend who happened to be a trader working for Goldman.

    He told me that there were NO ERRORS yesterday afternoon.

    The traders are joking about it, but everyone knows that there were no errors.

  32. michael schumacher commented on Aug 2

    ah the power of suggestion…….works every time.

    You’re too predictable Fred


  33. kharris commented on Aug 2

    Apparently not:

    Reuters 1447 ET 02Aug2007 Big US stock market move sparks questions; CME says no error
    A big jump in U.S. stocks in the last half hour of trading late on Wednesday sparked speculation that a bad trade in the futures market was behind the unexpected rally, but CME Group , the world’s largest futures
    exchange, said trading was normal.
    The rally led to market talk that a mistake had been made on a trade, resulting in a 180-point jump in the Dow Jones industrial average <.DJI> and a sharp rise in the benchmark Standard & Poor’s 500 Index <.SPX> in the last 20 minutes of trade on Wednesday.

    BR: I didn’t say it was a busted trade — I said it was an error that was corrected by buying it back in. The article does not address the issue of a mistake being bought back . . .

    “We had no price corrections and no trade busts,” she said. A trade bust is when a trade is canceled after the order is erroneously executed.

    There was also talk that the late Wednesday rally could have been related to an error in trading options on the S&P 500. A spokeswoman for the Chicago Board Options Exchange said there were no problems in the SPX options pit on Wednesday.

  34. Mike commented on Aug 2

    On Friday Dow plunged 150 points within last fifteen minutes of trading.
    No suggestions of fat-finger error

    On Wednesday Dow spikes 150 points within last twenty minutes of trading.
    It was a fat-finger, a fat-finger error…

    And he is surprised as to why people so skeptical about his explanations.

    What a boy!

  35. Sandy commented on Aug 2

    Can anyone say PPT?

  36. Vijay commented on Aug 2

    Your explanation sounds like total BS to me. So you’re claiming that a) your source knew about a mistake made by a competitor b) that mistake necessitated a covering move in the cash and futures market c) that cover moved the market even though you’d only have to go at most a few ticks deep in the S&P futures market (not to mention the depth available in the cash market) to completely dwarf that size and d) competitors knew about that mistake and somehow people were “frontrunning” that order in a market where the spread is a tick.

  37. Jdog33 commented on Aug 2

    Barry, I have to admit that when the indicies plunge 150 to 250 points no one talks about errors or mistakes that have caused the damage. You barely discuss the collusion naked short selling that these hedge funds participate in. However, when the market bounces off of extremely oversold conditions it is somehow an error.

    I love the site, but boy-o-boy is it bearishly slanted. Why all the Plunge Protection Team (PPT) talk when the market is rising? What basis are these comments made on?

    Is there any chance you could discuss some of the undervalued, good buys you see in the market. I mean after all, we are only up a little more the 2% on the S&P for the year and with the “fundamentals” as good as they look right now, there has to be some areas or stocks that are good buys?


    BR: While the PPT team exists, I DO NOT think they were in there buying SPUs yesterday, or Countrywide Financial or the Homebuilders.

    And as I wrote last night, we traded down to a key technical level (200 day moving avg) and bounced off it.

    However, the unusual run the last 30 minutes remains exceedingly curious to me . . .

  38. michael schumacher commented on Aug 2

    What I think is missing in the analysis is that despite all the overhangs in the market (and several that none of us are fully aware of) people seem to think that moving the market up 200 pts in 33 minutes is a normal technical bounce? Sorry but it was anything but that as we already had breached those levels earlier in the day……why did’nt it trigger then?

    If the news was positive and we had a tail-wind with regards to economic indicators (we most certainly do not)and the market dropped the same amount I would be just as skeptical about that as well.

    Whatever the reason for “it” is irrelevant,…but that was no mistake. Shorts do not buy at prices almost .20-.30 OVER the going ASK. And IF it were someone going long legitimately then why the rush??? seems to me that you would only increase you’re cost basis by buying everything in sight for 20 minutes or so.

    But I guess if you believe there was nothing wrong with that you must still be convinced that you are paying the same amount of money for your consumables.


  39. phil commented on Aug 2

    The S&P doesn’t run up 30 points in 30 minutes at almost exactly 12:30 pm pacific because of ‘fat finger traders’, oversold conditions, or whatever. There is only one entity that has the cash, motivation, and technical know how under the guise of ‘sovereign protection’ to successfuly implement a move of that magnitude. Sorry, you can talk till your blue in the face attempting to make casual associations but it won’t detract from who has motive and opportunity. Case closed. Is it constitutionally right or legal? No. But if we don’t go with the flow, we’ll be slaughtered until even the overt manipulation can’t prop up the markets any more.

  40. Fred commented on Aug 2

    Impressive follow through downside for the VXO…

    A clear S&P break of 1475 could bring 1490…lots of wood to chop there.

  41. Shrek commented on Aug 2

    Color me skeptical also.

  42. Bob A commented on Aug 2

    several comments on this on Buzz and Banter call this theory into question

  43. michael schumacher commented on Aug 2

    At least they waited one full minute later than yesterday to start doing it today……;-)


  44. MarkTX commented on Aug 2

    yes Phil, I agree….

    just who has that kind of PHAT CASH?????

    Hint: according to another post later today,

    “they” also have an 8% position in

    Lowenbrau! LOL…

    The real problem is that it is impossible for the “average” trader to “go with that kinda flow”.


    MS stated clearly that it (SPY/spx)) was bid up faster that greased lightning.

    the move was really not actionable.

  45. Mike commented on Aug 2

    Dow is up 100 points today.

    Is it another fat-finger error?

  46. IM commented on Aug 2

    If the market spikes suddenly, the excuse is always manipulation or a fat finger error. When the market drops suddenly its perfectly normal. These foolish bears !

  47. Ken M. commented on Aug 2

    …from the “rhymes with Sheryl” message:

    “In covering, it is likely the crowd front ran the order…”

    Does that mean us ‘little guys’ really don’t have a prayer of any chance, to protect our arses when we notice an abrupt change in the movement / trend in some market?

    Are the exits already blocked to us when the alarm sounds?

    Just a thought…


  48. tjofpa commented on Aug 2

    Oh, by the way. We haven’t had a 10 % correction in how long now?

    Why is that exactly?

    Oh, that’s right, I forgot. We can’t withstand one.

  49. Winston Munn commented on Aug 2

    Lee Wheeler commented on yesterday’s odd action: “I took a look at the top 10 “last half-hour boners” since 1998. Turns out that only one (Oct 1998) marked an important I/T or L/T bottom. Nine out of 10 were ultimately followed by lower lows, sometimes within days, sometimes weeks and sometimes months.”

    Nothing but sound and fury, signifying nothing.

  50. Thomas commented on Aug 2

    Regardless (or even irregardless) of the cause, these kind of moves are the sign of a sick market. The 450 point bungie jump triggered by a tough Microsoft call by my old college roommate back circa March 2000 told me that, despite a remarkable recovery, the end was near. The credit market is Pandora’s box and it is now officially open. Time to put a fork in it. We can talk about garnishes later.

  51. Mike commented on Aug 2

    I have no idea about the exact nature of that move (Aug 1st) and whether it was largely initiated by one entity but it was actionable via any of the futures contracts if you were right there with hand on trigger.

  52. Miki commented on Aug 2


    Could you please post the link about the corporate insiders buying more shares since the eve of Iraq?

  53. Mark commented on Aug 2

    its the “mysterious futures buyers” that only buy overnight when things are oh so liquid, that BR thought were going to vanish back in Dec., they’ve reappeared LOL

  54. angryinch commented on Aug 3

    Jason Goepfert of noted that yesterday’s 30-minute boomer was the third-largest SPX “last half-hour” gain over the past 10 years. So it was a pretty unusual occurrence.

    But as noted above, the prior occurrences, though they frequently clustered at or near temporary lows, were not a particularly good indicator of a continuation of a bull move. This was true during bull years and bear years alike.

    Nine out of ten resulted in lower lows down the road.

    So I wouldn’t get too excited about it unless you’re a nimble trader.

  55. mote commented on Aug 3

    “a Tralfamadorian test pilot presses a starter button, and the whole Universe disappears.”

    “So it goes.”

    “Slaughter’ House-Five” by Kurt Vonnegut

  56. jj commented on Aug 4

    check out the LOST orders from NYSE late Friday

    you” hear about it pretty soon

  57. Bill K commented on Aug 6

    FTN’s “Heard in the Midwest” report: “One of the more remarkable developments regarding
    Wednesday’s session was the speed and ferocity of the last 1/2 hour of trading. A 1.5% gain during the last half-hour in the cash S&P 500 index (SPX) is the third-largest closing gain in the past decade, following only 10/8/98 (as it was recovering from similarly oversold conditions…) and 8/5/98.

    Other extreme last half-hour surges approaching this magnitude surround some familiar dates: 9/19/01, 7/31/02, 4/24/00, and 9/4/98. All were clustered around big market inflection points, and most were periods we have looked at multiple times during the past few days as they had suffered similarly horrid breadth extremes.”

    It’s called intervention via impact trading.

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