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A small London based crypto asset trading platform called DeversiFi got quite a shock
two weeks ago when it mistakenly paid out a $24m fee to a large crypto miner.
Transferring crypto deposits generates a fee, known in the industry as a “gas fee”,
to compensate miners for the computing energy used to verify transactions on the blockchain.
DeversiFi should have paid out around $5, but instead transferred 23.7 million dollars
due to an error in their code.
On the blockchain, transactions are instantaneous, irreversible and anonymous.
Market participants have no recourse when an error is made.
Without safeguards in place, a polite request is one of the few options available.
In this case, within days, the recipient paid the entire amount back in full.
When DeversiFi saw their mistake, they looked on the blockchain and were able to see that
the recipient was one of the top 10 ethereum miners.
Although the recipient was anonymous, DeversiFi was able to reach out to them and explain
the error and request that the funds be returned.
Crypto miners often want to be perceived as good actors in the crypto space, so rather
than keep the money (which they could have) they returned it to its rightful owner.
DeversiFi is a DeFi platform that allows buyers and sellers to trade digital tokens without
going through a centralized exchange.
Crypto enthusiasts point to the fact that the money was quickly returned as proof of
shared community values in the DeFi space.
Will Harborne, the CEO of DeversiFi is obviously delighted that this happened but told the
press that he wouldn’t recommend to anyone else that they rely on the goodwill of strangers
on the internet to return their $24m.
A fat-finger error, is a term used in finance to describe an input error caused by pressing
the wrong key such that an order to buy or sell is placed in greater size than intended,
for the wrong financial product, at the wrong price, or with any number of other input errors.
It is also a term used to describe most of my guitar playing – but that is for a different
video.
Some of these errors are reversed with a quick phone call and apology and others are not.
A few fat finger errors like this in the crypto space have made it into the press in recent
months.
Compound another DeFi project accidentally handed tokens worth $90m to its users and
its owner threatened to report the recipients to the IRS before later backing down.
Alchemix - another DeFi protocol forgave 4.8 million dollars of borrowers’ loans prematurely,
essentially giving them free money.
Once again, almost everyone returned the funds once the error was pointed out.
Most modern trading software has built in controls to prevent huge fat finger mistakes
from occurring.
This protects both traders and brokerages from the losses that can come from these mistakes.
In addition exchanges have rules in place to allow traders to request cancellation of
fat finger errors.
Most exchanges require you to request a cancellation within thirty minutes of the trades execution.
Often the trades will be cancelled, and the person on the other side, who possibly bought
a dip or sold a spike, will think they have exited a winning trade, only to find that
they have had the trade entry, but not the exit cancelled.
For this reason, a lot of experienced traders refuse to trade when sudden spikes or dips
occur.
Back in the flash crash of 2010, some people were annoyed that automated market makers
stopped trading during the crash.
The reason this happened is that they will have coded their machines to stop trading
in such situations due to the risk of having some of their trades cancelled possibly causing
losses.
So, for today’s video let’s look at some of the biggest fat finger mistakes in recent
market history and see what lessons we can learn.
Before I dig into the list, let me quickly tell you about today’s sponsor -The Daily
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OK, so first up we have Knight Capital.
In 2012, Knight Capital was one of the largest market makers in US equities, their electronic
trading group had an average daily trading volume of more than 3.3 billion shares, trading
over $21 billion per day.
On the morning of August 1, 2012 they deployed some new trading software that malfunctioned,
buying shares in 150 different companies at a total cost of around $7 billion.
This all happened in the first hour of trading.
Knight did not have enough capital to settle these trades.
They first tried to get the trades canceled but were turned down as new rules established
after the “flash crash” meant that they could only cancel trades that had moved individual
stocks by more than 30 percent.
Thus only six out of the 150 different positions were eligible for cancellation.
Knight had no choice but to sell off the stocks it had bought.
Just as the buys had driven up the price of those shares, massive sell orders would push
prices down, possibly to a point that would have wiped out the firm.
Goldman Sachs who was a shareholder in Knight, stepped in and bought the entire position
at a $440 million discount, which wiped out most of Knights trading capital.
A week later, Knight raised $400 million from a group of investors, and by the next summer,
the firm was acquired by a rival, Getco LLC.
Next up we have UBS and the Dentsu IPO.
In 2001, Dentsu, Japans largest advertising agency went public.
Seconds after the exchange opened the exchange was hit with an order to sell Dentsu shares
by UBS (one of the three investment Banks Arranging the IPO) The order was so large
that it had to be a mistake.
It turned out to be one of the biggest and most costly errors in the history of the Tokyo
Stock Exchange.
According to market rumors, a desk assistant, who was supposed to sell 16 shares at ¥610,000
mistakenly keyed in an order to sell 610,000 shares at ¥16.
The order was cancelled as soon as it was noticed, but not before almost half of the
shares in the Tokyo listing had been sold.
The bank did keep its bookrunning position, but it had to buy back the shares it sold.
UBS were reported to have lost $100m dollars that day.
The CEO of Dentsu was furious.
The company had waited 100 years to go public, and then this happens.
Next on our list is Samsung Securities.
In April 2018, an employee at Samsung Securities was tasked with issuing a dividend to employees
of 2.8 billion won (which is around 2.5 million dollars) under an employee stock ownership
plan.
The employee mistakenly entered the figures into the system as “shares” instead of
“won”, issuing roughly $100 billion of ghost shares.
This was more than 30 times the firms issued share capital.
The company took 37 minutes to halt the trade, by which point around twenty employees had
already sold the stock they had received – This of course further complicated the issue.
Samsung later fired these employees who had not yet received cash payment as the trade
was halted during processing.
The incident raised questions about how easily Samsung Securities could issue stock with
so little oversight, and in the aftermath South Korea’s National Pension Service — the
world’s third largest pension fund — said that they would no longer deal with Samsung,
due to the lax systems in place at the firm.
The South Korean Financial regulator later suspended the CEO for three months, suspended
some operations of the firm for six months and imposed a fine.
OK, so number four: In October 2014, an unknown trader placed more than 40 orders totaling
$617 billion on Japan’s over-the-counter market.
This is a big trade – the dollar amount was larger than the size of Sweden’s economy
at the time.
The transactions included a bid to buy 57 percent of Toyota’s outstanding shares and
big stakes in Honda, Canon, Sony and Nomura.
The huge orders were quickly cancelled, but not before sparking concerns across trading
desks as screens began showing huge volumes of trades in Japans biggest stocks.
At number five, we have Bear Stearns.
In October 2002, a trader at Bear Stearns, the now-defunct US bank entered a $4bn sell
order when he meant to put in a $4m sell.
The trade caused a 100-point drop in the Dow Jones Average.
Approximately $600m of stock traded before the mistake was noticed.
A trader at the time was quoted in the news as saying that “You can put in one extra
zero by accident but to put in three extra zeroes is three fat fingers and that's pretty
stupid” Of course it was the early 2000’s and you were allowed to call people pretty
stupid back then.
You probably can’t say that any more…
OK, that was five, but let’s add one more.
In June 2017 a mystery trader rumored to be at a central bank who for the purposes of
this video we will call – Gold Fat Finger, or fat gold finger…
At 9AM London Time sold 56 tonnes of gold, an amount larger than the gold reserves of
Finland.
I know, a few of you are thinking that this must have been Gordon Brown, but of course
Gordon would have pre-announced the sale so that everyone else could trade in front of
him.
A trader named Ross Norman was quoted in the press at the time saying “This bears all
the hallmarks of a fat finger ‘muppet’” I’m not going to lie to you, this one is
maybe less dramatic than the others – it knocked the price of gold down by 1.6%, but
I got to refer to the guy as “gold fat finger, and a fat finger muppet.
So I’m happy.
Don’t forget to check out our sponsor The Daily Upside, by clicking the link in the
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If you enjoyed this video you will probably enjoy my video on the top ten rogue traders.
Have a great day and see you again soon.
Bye.