That Japanese Fat Finger Can ‘Absolutely’ Happen in U.S.

A funny thing happened after Michael Lewis’s book “Flash Boys” put the structure of the U.S. stock market under a microscope in March: The whole system ran pretty smoothly, at least compared with its recent past.

Sure, the electronic cat-and-mouse trading game that Lewis called a “rigged” system and others called “market making” may not have changed much. On the bright side, however, there have been no major technological meltdowns like the one that almost bankrupted Knight Capital Group Inc. or fouled Facebook Inc.’s initial public offering in 2012, or caused an almost 1,000-point plunge in the Dow Jones Industrial Average in 2010.

Now today, that nascent confidence is being undermined in a big way after 67.78 trillion yen ($617 billion) of mistaken over-the-counter stock orders flooded Japan’s equity market. Don’t for a minute believe that the U.S. market structure is fine-tuned enough to avoid a similar situation, according to Larry Tabb, founder of research firm Tabb Group LLC.

“That could absolutely happen here,” Tabb said in an e-mail. “While we do have circuit breakers and pre-trade checks for items executed on exchange, I do not believe that there are any such checks on block trades negotiated bi-laterally and are just displayed to the market.”

The Japan trading error is creating so much buzz that even the Drudge Report is tweeting about it. It’s easy to see why, given the numbers: $617 billion is bigger than Sweden’s economy, after all, and orders for more than half of Toyota Motor Corp.’s shares were caught up in the mistake.

‘Fat Finger’

The trade orders were canceled before being executed, but to many traders that may offer about as much solace as the fact that the guy who jumped the fence at the White House was tackled before he got to President Obama’s bedroom.

The term “fat finger” being used to describe the error has become a sort of catch-all description for some type of human error: errant keystrokes by a trader or programmer. And while in the U.S. we haven’t seen any fingers fat enough to cause headlines like these, neither has the fragmented U.S. marketplace been completely free of problems this year.

Just a month ago, a technical error at CME Group Inc. prompted a four-hour trading halt at the world’s largest futures market, preventing buying and selling of contracts tied to major stock indexes, Treasuries, oil and gold. In May, a trading error at Barclays Plc caused split-second swings in dozens of U.S. stocks including AOL Inc. and Caterpillar Inc., people familiar with the matter told Bloomberg News at the time.

No human system is perfect and every day computer systems that interact with the markets are being upgraded and modified, said James Angel, a Georgetown University finance professor who studies market-structure issues.

“As Darth Vader said in one of the Star Wars movies, ‘Don’t put all your faith in technology,’” Angel said in an e-mail.

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