Human error can upset the markets just as much as a global credit crisis or the prospect of a major debt default in the euro zone.
In the skittish and highly strung conditions that financial markets have experienced since the subprime crisis exploded in August 2008, the last thing that they needed was an unfortunate dose of human error - and of a spectacular quantum.
Over the years, financial markets have converted from the manual "open out-cry" system of trading to automated computer-driven systems that are far more efficient and that have allowed the value and volume of trades to grow exponentially.
On a relatively quiet and normal trading day in New York on Thursday, May 6, 2010 - while markets were focused primarily on the negotiations surrounding the European Union bail-out of an about-to-default Greece - the unexpected happened.
It seems that an over-zealous trader who had been given a large trade to execute became all muddled up with decimal places and, perhaps distracted by post-lunch coffee, placed an order to sell shares in Procter & Gamble that really set a cat among the pigeons. It seems, if market talk is to be believed, that the trader placed a selling order and entered a big "b" for billion rather than the more modest "m" for million in the quantity field.
Whatever the case, the effect was instantaneous and its ripples were felt across the world. At about 14h25 the unfortunate trader, who has mysteriously and mercifully remained nameless, hit the "enter" button of the incorrectly placed order, which triggered a huge sell-off in the market. Within seconds, the share price of Procter & Gamble collapsed from $61 to $39 and the Dow Jones industrial average plummeted a mighty nine percent, erasing billions of dollars in market value. This staggering fall eclipsed the market slump when it re-opened after the September 11, 2001 terrorist attacks on the World Trade Centre or in the wake of the collapse of Lehman Brothers.
To some extent, the automated trading systems exacerbated the problem, because, as the incorrect order was entered and began trading, the price of Procter & Gamble fell precipitously. Then all the other Dow industrial average's 30 constituent shares were sucked into the slipstream and began falling. As a result, stop-loss and automated orders from other brokers kicked in, adding fuel to the fire. For about 20 minutes, while traders and the market tried to work out what was behind the sharp drop, there was chaos. But once the error was discovered, things returned to an even keel, and when the market finally closed, it was down a more modest three percent.
Naturally, the United States Securities and Exchange Commission is set to work with other financial regulators and exchanges to review the "unusual" trading activity. The report, when it is released, could make interesting reading.
We have experienced "fat finger" (incorrectly placed) orders on the JSE over the years, but never on quite this spectacular scale. The JSE also has mechanisms to deal with this type of "rogue" order, so the repercussions have never been as dramatic.
Nonetheless, the consequences of these careless errors are typically losses to some parties - innocent counterparties or perpetrators of the offending trade, or both. This is just another example of the many factors that collectively influence financial markets. It is clearly not just company results, political and socio-economic activities, and investor nerves that affect markets; human error can also have a big effect. Fortunately, human error, no matter how sudden and sharp the impact, should be of only a relatively short duration. It is also evidence of just how big the numbers have become and how blasé we are about them. It was not all that long ago that a hundred thousand or one million was a very big number; now we do not even blink when bombarded by numbers in billions and even trillions! Just look back to the billions of the subprime losses or the trillion dollars of the Greek bail-out package.
The markets certainly have a great deal to consider at present. The eruption of the Icelandic volcano and its implications for air travel and tourism; the consequences of the Greek financial bail-out and possible additional sovereign debt concerns in Ireland, Spain and Portugal; the nagging questions surrounding the financial stability of American banks; and the slow and stuttering move from recession to low growth with relatively high levels of unemployment all add to high levels of uncertainty.
All these factors serve to underline that stocks and shares are for long-term investors.
- David Sylvester is the chairman of the Shareholders' Association, telephone 021 686 7567.
This article was first published in Personal Finance magazine, 3rd Quarter 2010. See what's in our latest issue