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Citi Trader received 711 warning messages before triggering Flash Crash
(Bloomberg) — For a Citigroup Inc. trader in London, the morning of May 2, 2022, went from bad to worse.
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It was a bank holiday in the UK so it should have been a quiet day at the markets. Shortly before 9 a.m., the employee at Citigroup’s Delta One trading desk – who was working from home – began putting together a trade that would hedge the bank’s exposure to the MSCI World Index.
A tool that employees normally used for such a transaction was not available that morning, so the trader had to manually build the basket of stocks. That’s when things started to go wrong.
In Citigroup systems, traders have the option of entering the notional value of a transaction they intend to carry out or the number of index units they intend to trade. On that day in May, the trader intended to create a basket of stocks valued at US$58 million, but accidentally entered that 58 million into the quantity field, creating a gigantic US$444 billion basket containing 349 stocks from 13 different countries.
The Wall Street giant’s systems immediately triggered hundreds of warnings, ending up blocking some – but not all – trades from taking place. Still, around $1.4 billion worth of shares began to be sold on European stock exchanges.
The markets immediately began to go haywire. Within minutes, the trader realized the error and canceled the order. But the damage was done: The error triggered a five-minute sell-off in European stocks, wreaking havoc on stock exchanges stretching from France to Norway.
Two years later, UK regulators on Wednesday revealed the results of their long investigation into Citigroup’s actions that day, as they slapped the bank with 61.6 million pounds ($78 million) in fines for the error. Their findings offer the first window into how a sudden failure – along with a series of risk management lapses – turned into a sudden collapse that, at one point, wiped 300 billion euros ($325 billion) from stocks. Europeans.
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It’s the latest blow to CEO Jane Fraser, who has spent years trying to shore up the credit giant’s underlying risk management systems.
“These failures led to over a billion pounds worth of erroneous orders being executed and risked creating a disorderly market,” said Steve Smart, deputy executive director of enforcement and market supervision at the Financial Conduct Authority, in a statement. “We expect companies to review their own controls and ensure they are appropriate given the speed and complexity of financial markets.”
The story continues
The trader has since left Citigroup, according to people familiar with the matter. A bank spokesperson declined to comment.
Fifteen minutes
Just before the trader began arranging the erroneous trade, a separate Citigroup team was figuring out how to handle its responsibilities that day.
The bank’s algorithmic service desk, which normally oversees the real-time monitoring of internal executions, decided to transfer these responsibilities to the electronic execution desk because it had employees out on scheduled leave that day.
When the trader first entered the wrong trade, he was faced with a wall of 711 warning messages. He quickly canceled the ones he could and the order was placed at 8:56 am
Trades began to be executed on exchanges in Austria, Belgium, Denmark, Finland, France, Germany, Italy, the Netherlands, Norway, Portugal, Spain, Sweden and Switzerland, causing a sudden drop in European indices. Inside Citigroup, executives were intrigued by the crash and consulted news agencies to try to figure out what was behind it.
At 9:10 a.m., the trader canceled the order, saddling Citigroup with a $48 million loss.
The electronic execution desk had been receiving hundreds of alerts about erroneous trades, but was unable to escalate any of them. A separate team, known as the eCommerce Risk and Controls team, also escalated the incident to the electronic enforcement desk, but not until 9:31 am.
“The immediate cause of the trading error was a manual entry error on the part of the trader,” the Bank of England Prudential Regulatory Authority said Wednesday in its findings. “The error was then not identified by any of the company’s risk functions dedicated to real-time monitoring of the company’s trades, but by the trader approximately 15 minutes after the trade was entered into the company’s systems.”
Hard and soft blocks
Citigroup’s systems had two lines of defense against these types of erroneous trades: soft blocks and hard blocks.
The bank defines a series of limits for each type of block. If a trade triggers one of these, a pop-up will appear. Flexible blocks can be replaced, but not rigid blocks.
Citigroup increased some of these limits to take into account periods of greater volatility during the pandemic. But two years later, I hadn’t redefined those limits.
Still, it was these blockages that prevented part of the trade from taking place. But UK regulators noted on Wednesday that in the US, Citigroup had rules in place since 2013 that would have prevented all trading from taking place.
“We are pleased to resolve this more than two-year-old issue that arose from an individual error that was identified and corrected within minutes,” Citigroup said in a statement. “We immediately took steps to strengthen our systems and controls and remain committed to ensuring full regulatory compliance.”
The penalties were a blow to Citigroup’s stock trading unit, led by Fater Belbachir. The division has spent years trying to climb the stock market ranks, but remains far behind rivals such as Goldman Sachs Group Inc. or JPMorgan Chase & Co.
When regulators were formulating the size of the penalty to be applied to Citigroup for the failures, they said they considered that the trading desks at the bank’s Delta One division that used the order management system at the center of the error generated about $612. million in the nine years leading up to the erroneous trade, or an average of about $68 million per year.
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This would mean that, between the fines and the day’s trading losses, the erroneous trade would cost these tables almost two years of revenue.
–With assistance from Laura Noonan.
(Updates with more information about the trader in the tenth paragraph.)
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