The FCA is in danger of attracting regular readers to its Market Watch newsletter. Here’s an extract from Edition No. 46, about this momentary spike in the price of HSBC back in January…
Firm A received an order from a client to buy $2.5m worth of shares in HSBC. The trader at Firm A misunderstood the order as a purchase of 2.5 million shares and entered an order to buy 2.5 million shares using Electronic Trading Services provided by Firm B. The trader used a Percentage of Volume (PoV) algorithm, provided by Firm B, with the participation rate set at 20% and no price limit. A PoV algorithm will automatically input orders to achieve a designated proportion of executed/traded volume. Where no price limit is set, the algorithm will continue to trade in line with the participation rate, regardless of price, until the order is completed.
Firm A had a hard consideration limit for single orders, which meant that any order over an agreed financial value would be automatically rejected. The order to buy 2.5 million shares of HSBC breached this limit and was therefore rejected by Firm B. The trader at Firm A then attempted to submit an order for 1.5 million shares, but this still exceeded the single order limit and was therefore also rejected. The trader, in the absence of the use of a formalised override procedure, then requested assistance from his contact at Firm B on how to input the order.
Firm A had been a client of Firm B for some time, they were regarded as experienced professionals and this scenario had occurred previously because of the consideration limit for that firm. The trader at Firm B suggested a solution that had been used previously and had become regarded as standard practice. He told the trader at Firm A to break up the order into five orders of 500,000, with the expectation that the orders would be submitted consecutively upon completion or simultaneously with a reduced participation rate.
The trader broke up the order as directed, submitting five orders in rapid succession using the same PoV algorithm, but he set each order to the original 20% participation. Consequently, Firm A’s five orders were effectively competing with one another and collectively trying to purchase 2.5 million shares, at a participation rate of 100% with no limit price. As a result, the HSBC share price spiked from 629p to 688p.
The trader’s mistake in confusing an order to buy $2.5 million-worth of shares with an order to buy 2.5 million shares, though of concern, was not the cause of the spike; that would have been a very large order, but given the specific circumstances could have been executed at 20% of volume without causing the market to spike. The problem was simultaneously entering five orders, all trying to work at 20% PoV without any price limitation.
Miraculously, the trader involved and his/her employer seem to have avoided a £20m fine, lifetime bans or even asset seizures.
Or maybe those are still to come…
“Fat finger” trade seen costly after HSBC price spike — Reuters