A trade last June of 1.8 million ounces of gold instantly drove down the global price for the yellow metal. The next day a purchase of 815,000 ounces recouped most of those losses, and raised speculation of a “fat finger” trade. 1 This incident followed news of a trade in the silver market that also indicated a possible error in order entry. What is a fat finger trade and how can it impact gold prices?
What Is a Fat Finger Trade?
The term fat finger implies 2 the probability that someone entered a number with one too many digits, turning a standard order into a market mover. For example, the 1.8 million ounce gold trade last June was suspected to be unintentional; whatever the motivation was, the incident significantly affected market prices for a couple of days.
Current markets are particularly sensitive to fat finger errors due to lighter trading trends. Many traders are believed to be sitting on the sidelines while waiting for the markets to show stronger signals of a bearish or bullish direction. In fact, the level of price swings hit the lowest mark in over a decade in April, and continued mixed market signals have reinforced the wait-and-see mentality.
How Can Fat Finger Trades Impact the Market?
If the noted trades are, in fact, nothing more than errors, they still have a significant impact on the trends and data used by technical traders. Technical traders watch the volume, size, and direction of trades on a day-to-day basis. Computer programs chart these factors in great detail, and those charts then indicate signals of a gold rally or pullback. Any large, unintended errors skew those signals and give false indicators, generating undesirable selling or buying, as well as market confusion.
Analysts have also attributed some fat finger trades to more suspicious origins. Since they often do move markets in a major way, it is possible for a dubious trader to bet on the market one way and make a trade that moves prices in the opposite direction. By betting on a market swing and then making a supposedly “fat finger” trade, it is possible to make money on that market movement and then reverse one’s position. While such an action could face regulatory sanctions or worse, it is usually difficult to prove as intentional, much less punish.
The recent, faulty precious metals trades were the suspected source of a handful of “flash crashes” and market swings. Some gold traders breathed a sigh of relief that the blip failed to take gold’s price per ounce below its 200-day moving average. Their sentiments were driven by the fact that this average is a key indicator included in a number of automated trading programs, and breaking that mark could have potentially triggered other unintentional market movements, such as selling by speculators or buying by long-term gold investors.
Market Fundamentals
Rather than the normal factors that move the price of gold and other precious metals, these mistaken trades serve only to confuse the markets and, perhaps, create buying opportunities for savvy market observers. In fact, such events highlight the core difference between short-term traders and speculators and long-term investors. The events determining the swings in prices over a few days are less important than proper assessment of what affects gold prices over years and decades.
While long-term investors in gold can view such swings as opportunities to average down or up, it is important that they not affect overall investor sentiment and market fundamentals.