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The Tale of the Fat Finger

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Traders may need to take some typing classes. Last week, the stock market experienced one of the most eventful days in its history, with at one point the Dow Jones industrial average dropping almost 1,000 points. The plummet began around mid-afternoon and within 20 minutes, America’s top 30 firms saw their share prices plunge almost 9%, wiping out billions. Shares of Accenture, a large consulting firm, fell from $40 to one penny. P&G’s stock price was down more than 30% at one point.  As chaos ensued, reporters, traders and institutions struggled to identify the cause of such a precipitous drop in the market.

Some began to speculate that a trading error known as a “fat finger problem” at a major investment bank, where a trader had mistyped a “b” for billion instead of an “m” for million, in a trade of futures, involving Procter and Gamble, was the cause. Others dismissed this theory, arguing that the market drop was caused by a computer malfunction. Conspiracy theorists chimed in, blaming extraterrestrials, North Korea and terrorists. Today, the head of the SEC, Mary Shapiro, testified before a congressional panel about the events. While stating that the SEC had ruled out the “fat finger” theory and malicious market intervention, she admitted that her organization had not yet determined the cause of the market plunge.

This whole mess holds important lessons for market investors and regulators. The idea that a typo could send the stock market plummeting and spur billion-dollar losses proves that the market needs stricter regulation and oversight (preferably internal). Six major U.S. securities exchanges admit there is a need for a uniform system of “circuit breakers” to slow trading during times of extreme market volatility. While executives of the New York Stock Exchange and Nasdaq believe they are capable of self-regulating, they agree that changes to the system of overseeing the financial exchanges are needed. Larry Leibowitz, chief operating officer for NYSE, says “when a trading problem occurs . . . there is no central mechanism to coordinate a market-wide response.” Last week’s market plunge has few lasting consequences. Still, it should serve as a lesson to add stability and safeguards to the market.

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