September 26, 2022

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- Not a good feeling - E24

– Not a good feeling – E24

At most, 3,000 billion were temporarily cut off from exchanges in a “quick crash” this week. You feel so stupid, says the interest rate strategist, about making so-called sausage finger mistakes at work.

Many safety mechanisms will protect against human error in stock trading, says Lars Moland, interest rate strategist at Nordea.
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Citigroup’s sausage finger mistake sent the stock market crashing at lightning speed and had experts scratching their heads this week. He joins the ranks of the so-called rare but dramatic flash incidents.

– It’s not a good idea to put it that way, says interest rate strategist Lars Moland at Nordea to E24.

He no longer trades directly in the market, but did so in his previous job as an interest rate manager. And errors can occur.

– It happened that you bought when you were going to sell or buy the wrong gadget, but fortunately not something that has serious consequences. It was detected and cleaned quickly without costing a lot of money.

– You feel very stupid, he says.

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The director of the stock exchange said about the shock of the fall: – We were able to stop the shares that fell quickly

The mistake made by a Citigroup employee in London on Monday had consequences for stock exchanges across Europe:

  • Without any warning, Nordic bourses fell sharply at 09.57 on Monday, before quickly recovering the loss.
  • At worst, the main index in the Oslo Stock Exchange fell by 4.83 percent, while the Stockholm stock index fell, Where the fall occurredby eight percent.
  • The European wide market was down at most by three percent, equal to one 300 billion eurosor about 3000 billion Norwegian kroner.

Citigroup admitted the error, which contributed to the excitement of the minutes and also affected small Norwegian savers.

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“This morning, one of our traders made a mistake entering a transaction,” Citigroup wrote in a statement, according to Reuters.

– Annoying that it could happen

It’s a temporary fall on paper, but for some it may have profound and significant implications. Although it wasn’t a very deep landing, says Associate Professor Kjell Jorgensen in BI, it’s still troubling that it could still happen.

Associate Professor Kjell Jørgensen at BI has done research on the trading that machines do, known as algorithmic trading.

He points out that throughout history there have been several periods of very rapid declines in the stock market. Back in 2010, the US Dow Jones fell by nine percent in a matter of minutes, an event It became known as the “rapid meltdown”.

– It is strange that this can still happen. Because I think one has learned a little, and people have been afraid of that for a long time. I thought the mechanisms were so in place that this could not happen. Now, this is not very dangerous, but it is serious enough.

Automated trading is an important reason for the spread of the rapid decline in stock market prices from the Swedish market to other exchanges in the Nordic countries and Europe, according to Jorgensen.

Markets are highly integrated. It’s about the new infrastructure we’ve built.

Jørgensen points to the changes that came with the introduction of new financial market rules in Europe and the United States, which were intended to break up local stock exchange monopolies.

Read on E24 +

‘Flash Crash’ and ‘Fat Finger’: – A typo with serious consequences

– Up front, Equinor previously only traded on the Oslo Stock Exchange and possibly the New York Stock Exchange, but is now traded on 30-40 stock exchanges around the world. This means that a super-fast network must be built using super-fast algorithms that ensure that prices are correct and the same across all exchanges. It’s a complex and lightning fast network.

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According to Jørgensen, algorithm trading accounts for between 80 and 90 percent of trading on exchanges today.

It also indicates the mood prevailing in the markets.

– I also think the markets are very nervous right now. It doesn’t take a lot of sparks to get other things moving. If a big sale is started somewhere and then people pull themselves together.

This is how stocks can spread

Interest rate strategist Lars Moland at Nordea points out mistakes that can be made in stock trading, eg you miss volume or price when placing a buy or sell order.

– So there are orders in the market. If the price is in percent, then there may be a buy order of 99.98 and less – in different sizes.

– If you sell a lot, you usually click on the orders at the bottom. If you sell so much that all the existing orders are sold out, the price could theoretically drop completely.

He points out that in such a situation, the security mechanism of the exchange will usually strike and a break in trading will occur.

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Citigroup admits mistakes led to shock

Moland explains that market participants often trade shares that are similar to each other on different exchanges.

– If you then see that one stock is going down very hard, the other one looks too expensive – the one you’re comparing to. So you may want to sell it as well. This is how it can spread – first within the same exchange and then between exchanges.

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For example, if a broker is trading on an unusual exchange, enters the wrong name or places an order larger than usual, a warning will usually appear, Moland says.

– If it is much larger, you may receive two, three, or four warnings before you can cast. The problem can be if you have too many warnings on the system. Then you sit down and automatically push through the warnings without even seeing what’s written there.

Concern about the existence of free markets

Stocks director Thomas Breivik at DNB Markets explains how the downfall can spread between markets. He asserts that he does not know the details of the requests that were put on the Swedish market.

– But if you assume that orders are placed in all Nordic markets, then this is the case where digital bots set prices in all markets. What we call e-liquidity providers, i.e. market participants that operate on digital platforms and set bi-directional prices in all markets to provide liquidity.

When shares are sold in one market, they must mitigate this risk by selling shares in other markets. For example, if they own many shares in the Nordic region, they go to other European stock exchanges and try to sell similar types of shares to mitigate risk. Then you have an infectious effect.

Breivik stresses that there should be no mechanisms to prevent such infectious effects.

– Because we are concerned about the existence of free markets. If there are price differences between markets that investors can take advantage of, that is part of what is actually their job. Where you may be able to order valves is where you started. We have built security mechanisms into our systems so that no one can place the type of order that has been placed here without stopping it.