CBOT Probes Big Error in Dow Futures
Thu July 3, 2003 02:10 PM ET
By Ros Krasny
CHICAGO (Reuters) - The Chicago Board of Trade, the No. 2 U.S. futures exchange, said it is investigating a huge trading error in its mini Dow Jones futures contract YMU3 on Thursday that briefly sent the entire U.S. stock market reeling.
Trading sources said a large futures commission house entered an order to sell 10,000 contracts of mini Dow futures instead of the intended 100 contracts.
With average daily trading volume of about 48,000 contracts in June, the mini-Dow futures contract -- which is traded electronically on the CBOT's a/c/e platform -- plummeted when hit by the supersized sell order.
"We are investigating as a matter of course. I don't really have anything more to report at this stage," said CBOT spokeswoman Laura LaBarbera.
Selling signals radiating out of the mini-Dow contract quickly dragged down the Dow Jones Industrial average .DJI about 50 points, and hit S&P 500 futures and cash indexes as well.
"Mini-Dow futures are not build to absorb that kind of action," said Kevin Pendley, president of CharTable Research, who trades mini stock index futures at the CBOT and at the Chicago Mercantile Exchange, the largest U.S. futures exchange.
The selling hit just when stocks were mounting a rally on the back of report showing a surprisingly strong result for the U.S. services sector in June.
"There was sudden, intense volatility with no news -- it certainly acted like there was some kind of error," Pendley said.
All-electronic mini stock index futures have been a huge growth area for the Chicago exchanges, attracting interest from day traders and individual investors and increasingly from institutions attracted to their liquidity.
CBOT mini-Dow futures typically trade much larger volume than the exchange's original DJIA futures, where the contract size is twice as large.
Floor traders at the CBOT said the ability of the massive error to slide through, unchecked, showed a potential dark side of electronic trading -- although big errors have been made in traditional open-outcry trading as well. MISTAKE BRINGS TO MIND OTHER SCREEN-TRADING BLUNDERS
In October 2002, a trader at Bear Stearns Cos. Inc. BSC.N entered an erroneous order to sell $4 billion worth of stocks 20 minutes before the closing bell, fueling an already tumbling market.
Bear Stearns said the order was the result of a "clerical error" and should have been entered as $4 million.
In December, the New York Stock Exchange released a memo reminding members of their responsibility to guard against such orders, saying a number of erroneous orders had been sent to the exchange through electronic order entry system.
At the time, the NYSE said many of the orders were the result of human mistakes or defective software that sent orders for an incorrect number of shares or resent stock orders from the previous trading day.
The No. 1 U.S. stock exchange reminded firms they must have an electronic order entry system in place that limits who can use the system and that can limit or prohibit orders that exceed a firm's current credit. (Additional reporting by Nicole Maestri) ((Reporting by Ros Krasny; Editing by Andre Grenon; Reuters Messaging: ros.krasny.reuters.com@reuters.net; e-mail: ros.krasny@reuters.com; tel: 312-983-7327) |
