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Solly
Accidentally sells $880 Mil of Futures
Salomon
Trader Sold Futures By Mistakenly Leaning on Keyboard
Paris,
Oct. 16 (Bloomberg)
-- For one French bond futures trader, it was the worst
possible nightmare -- executing an $887 million sell order
in a rising market without even noticing. For every other
trader it was a mystery -- why a government bond contract
would tumble on an otherwise calm day.
It took almost three months, the world's biggest detective
agency, and Europe's largest computer services company
to find the culprit: an elbow, and an F12 key with unsuspected
powers. ``It was a quiet day,'' recalls Jacob Long, a
trader at Banque Nationale de Paris, who had ducked out
for a late- afternoon snack. ``I was just starting to
eat and suddenly the 10-year just plummets.''
It was shortly before 4:12 p.m. on July 23. Without realizing
it, a Salomon Smith Barney trader in London (whose name
has not been disclosed), sold 10,607 futures contracts
on the Matif futures exchange in Paris. Each contract
was worth 500,000 French francs ($83,600). At a stroke,
the hapless trader executed transactions worth more than
10 percent of the average daily volume on the exchange
at the time.
Calling
In Sleuths
So
says a preliminary report released Thursday by Matif,
following an investigation by Cap Gemini SA, a French
data processing company, and Kroll Associates, a part
of Fairfield, Ohio-based Kroll-O'Gara Co. Salomon won't
comment until the final report is in.
Matif officials caught the problem within minutes when
the Matif called Salomon to confirm the trades. But the
rest of the market didn't know this, leading to wild rumors
about who was putting through such a large sell order.
A person at Salomon said the first reaction of the traders
on the French government bond desk in London was to say
they hadn't put through any large orders. Then when they
checked the automatic trading system, they found 145 sell
orders they had never heard of. Other banks had already
agreed to buy almost three-quarters of the contracts Salomon
was inadvertently offering.
Salomon immediately canceled the unmatched sales and asked
for the matched ones to be canceled. The Matif said: Non,
trop tard! Too late. That's when the investigators were
called in.
'Inadvertent
Operation'
The
conclusion of the investigation? The trades stand, since
they didn't result from faulty hardware or software. It
said the trades resulted from ``the prolonged, unintentional
and inadvertent operation of the `Instant Sell' key by
a Salomon trader.''
That's where the elbow and the F12 come in. The trading
system that Salomon was using, a so-called GLWin installed
by GL Trade, which makes trading equipment for the Matif,
had an F12 key that repeated the last order put through
on the machine, in this case a sell order for 100 10-year
bonds.
``We were on another screen and leaning against the keyboard
and I guess we were trading,'' a voice recording provided
by Salomon Brothers International Ltd. to an inquiry into
the incident said.
The leaning was long enough to produce 145 repetitions
of the order.
The person at Salomon said the traders didn't know of
the F12 key's powers, which aren't mentioned in either
the machine's manual or in the training course. The system
had just been installed just days before the incident,
on July 14, and traders normally used a function that
required several clicks and asked for final approval before
the order was sent off.
Biggest
Mistake
The
sales drove the price of the futures contract down by
1.4 percent in a few minutes. A price move that size would
have potentially wiped $12.4 million off the face value
of the contracts traded, although the price quickly rallied.
Bonds worldwide were soaring throughout the summer, as
inflation looked set to slow even further in Europe and
the U.S., and as investors fled Asian markets.
French government bond traders say they see what are evidently
mistaken traders go through frequently. But Matif insists
that while mistakes may happen, never has there been one
of this size, and never has it had a major dispute with
a market participant.
Most large French banks said they don't use the trading
machines, preferring to work on their phones and put trades
through brokers. That's what Salomon does now. It unplugged
the machines on July 23, and until it can upgrade its
software and feels comfortable with it, will trade by
phone through Paris futures brokers as well.
The mistake would have been avoided if GL Trade, which
supplies trading systems for the Matif, had fitted Salomon
with the latest software, which eliminates the F12. It
was made available from July 1, and it's not clear why
the older system was installed on Salomon's machines July
14. The Matif won't comment about GL Trade.
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