By Matt Jarzemsky
A so-called fat-finger error was at the root of unusual trading
in seven oil-related stocks Tuesday, according to a person familiar
with the matter.
Shares of Rowan Cos. (RDC), National Oilwell Varco Inc. (NOV)
and other oil drillers and equipment makers jumped between 3% and
9% each around 3:47 p.m. EDT Tuesday, before quickly reversing the
gains. The activity led to investigations by stock exchanges and a
buzz across trading desks, as market participants tried to figure
out what had taken place.
A trader placing an order to buy or sell a basket of stocks
accidentally entered the wrong size for the transaction, said the
person familiar with the situation. Such incidents are sometimes
referred to as fat-finger events, likening them to an instance when
a trader hits a button unintentionally.
Exchanges operated by NYSE Euronext (NYX), Nasdaq OMX Group Inc.
(NDAQ) and Direct Edge Holdings LLC reviewed the trades late
Tuesday, flagging them as "potentially clearly erroneous," but
later said they would stand.
Traders noted the activity and searched for an explanation, with
some speculating the cause was faulty trading software or a mistake
by a broker trying to offset a position taken on behalf of a
client.
"People have a heightened sense of awareness toward these
things, given the 'flash crash' and the Knight issues," said Dave
Lutz, managing director at Stifel Nicolaus. "When you have large
amounts of volume in a basket of securities that are moving
quickly, people are going to try to figure out what happened."
In the May 2010 "flash crash," the Dow Jones Industrial Average
quickly lost nearly 1,000 points before recovering much of the
drop. This past August, glitches in the electronic trading system
at Knight Capital Group Inc. (KCG), one of the biggest facilitators
of stock trading in the U.S., caused price swings in dozens of
stocks and led to a $440 million loss for the brokerage.
Quirky trading activity isn't a rare occurrence for the U.S.
stock market. In a separate incident Wednesday, Nasdaq canceled
trades of Tyco International Ltd. (TYC) after flagging them as
"potentially erroneous." The midmorning transactions would have
caused the stock to jerk sharply higher. The exchange didn't
respond to requests for comment.
The rise of automated, computer-driven trading and the increased
complexity in the structure underlying the U.S. stock market has
drawn increased investor and regulator scrutiny lately. It can also
magnify the ripple effect from trading errors, said Rob Hegarty,
global head of market structure at Thomson Reuters.
"In the old days, a 'fat-finger' trade like that was an isolated
event. A fat finger today will trigger more volatility in the
market, which triggers more activity from algorithms. There's a
cascade effect," he said.
Write to Matt Jarzemsky at matthew.jarzemsky@dowjones.com