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 . . .
Thursday, August 02, 2007 | 10:48 AM | Permalink
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Comments
Fat fingers need lovin too.
Posted by: KP | Aug 2, 2007 10:56:07 AM
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).
Posted by: Fred | Aug 2, 2007 11:01:01 AM
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.
Posted by: Bill King | Aug 2, 2007 11:02:07 AM
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.
Posted by: johntron | Aug 2, 2007 11:09:15 AM
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.
Ciao
MS
Posted by: michael schumacher | Aug 2, 2007 11:17:12 AM
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?
Posted by: Julie | Aug 2, 2007 11:19:05 AM
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.
Posted by: SteveC | Aug 2, 2007 11:24:34 AM
Barry, please tell us that you are kidding about the fat finger explanation.
You are not serious, right?
Posted by: Extravagant and Unrestrained Imagination | Aug 2, 2007 11:30:10 AM
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
Posted by: yc32 | Aug 2, 2007 11:33:09 AM
"Sheryl": Putting the income back in incompetence?
Posted by: AD | Aug 2, 2007 11:34:09 AM
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.
Posted by: Futes Trader | Aug 2, 2007 11:42:33 AM
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.
Posted by: Fred | Aug 2, 2007 11:45:04 AM
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?
Puh-leeze.
But don't take my word for it, speak to someone with real pit or floor trading experience, then get back to me.
Posted by: Fantasia | Aug 2, 2007 11:49:43 AM
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.
Posted by: IM | Aug 2, 2007 11:52:46 AM
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
Posted by: Aaron | Aug 2, 2007 11:53:47 AM
aaron-
no it's not you I recall that too.
Fair weather fans so to speak....
Ciao
MS
Posted by: michael schumacher | Aug 2, 2007 11:57:56 AM
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.
Posted by: Aaron Byrnes | Aug 2, 2007 12:10:35 PM
Aaron-
Did BR considered "MER was aggressively buying SPUs in the beginning of July" as an error trade?
Posted by: Fantasia | Aug 2, 2007 12:11:33 PM
Fantasia - fair point.
Posted by: Aaron | Aug 2, 2007 12:15:42 PM
>>institutional investors buys when the market is cheap?>>
In relation to what????
Ciao
MS
Posted by: michael schumacher | Aug 2, 2007 12:18:49 PM
rube-goldberg financial doggerel. this guy is trying to sound smart.
Posted by: shauncy | Aug 2, 2007 12:25:47 PM
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 . . .
Posted by: Barry Ritholtz | Aug 2, 2007 12:27:41 PM
PREVIOUS COMMENT DELETED
Due to incredibly inappropiate linkage, Aaron has been sent to the penalty box for an indeterminate period of time.
Posted by: Barry Ritholtz | Aug 2, 2007 1:12:22 PM
Attaboy BR.
BTW, fat fingers or not, it's interesting that it's (mostly) holding the gain (so far).
Posted by: Estragon | Aug 2, 2007 1:27:10 PM
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.
Posted by: Chris G. | Aug 2, 2007 1:50:26 PM
