A rare ‘flash crash’ in European stocks caused by a Citigroup trader highlights the risks from computer-initiated sell orders exacerbating a single human error.
he OMX Stockholm 30 Index slumped as much as 8pc in just five minutes on Monday, but quickly recovered most of the losses. A trader at Citi’s London desk made an error inputting a transaction, sparking an abrupt selloff across European equities that briefly wiped out €300bn.
“The problem is not the mistake per se, but all the algorithms and stops that were triggered,” said John Plassard, a director at Mirabaud. “It shows the market is always vulnerable to human error and that algorithms and various CTAs are far too present in markets,” he added, referring to the commodity trading advisors that often use rapid systematic orders to pursue market trends.
On Monday, there was added pressure: a public holiday in the UK left European stock markets with about a quarter less liquidity than normal, giving the remaining trades an outsized chance of moving prices.
It was “the worst day possible for this to happen,” Guillermo Hernandez Sampere, head of trading at asset manager Manfred Piontke Vermoegensverwalt in Germany. While the circumstances were unusual, he said the flash crash demonstrated a broader need to take action and prevent such moves in the future.
“We shouldn’t wait for the regulator to do something, that’ll take too long – instead, brokers, banks and stock exchanges need to implement changes now, such as introducing circuit breakers,” he said.
Previous sudden crashes include a plunge in the pound in 2016, as well as Wall Street’s Black Monday in October 1987 and the flash crash in May 2010.
In the US, regulators have tried to stave off further shocks to share prices with new rules including greater disclosure for big traders, as well as circuit breakers to cool off overheated price moves and curbs on algorithms to prevent shares moving too quickly.
Europe, though, governs its markets mostly on a country-by-country basis.
Nasdaq Stockholm, where Monday’s crash originated, has volatility guards for individual stocks, according to spokesperson David Augustsson.