The Gold Finger Trade “fat-finger trade” of Apr 30 2012 (4-30-2012)

A Manipulative Algo Trade?

On Apr 30 2012 the gold market was briefly shaken by an unusually large early morning sell order, of 1.24 Billion USD, which triggered a brief trading halt in gold futures and left traders questioning whether the transaction was a mistake, manipulative or what was the motivation of the seller.

Gold’s London AM fix on Tuesday May 1st was USD 1,661.25, EUR 1,253.02, and GBP 1,024.70 per ounce. On Monday Apr 30 the AM fix was USD 1,662.50, EUR 1,256.61 and GBP 1,021.44 per ounce.

What is a Fat Finger Trade?

The Gold Fallout

Gold fell $14 in one minute despite no breaking financial and economy.

“The market was given a short period to recalibrate and … it was for 10 seconds,” a CME spokesman said. “It only happened in gold futures, in the June gold contract.”

Gold 3 Day Chart – (Bloomberg)

Gold traders buzzed with speculation that the transaction was an input error – a so-called “fat finger” trade. “Or a Gold Finger as it might be known in the bullion market,” traders at Citi joked in a note to clients.

The massive size of the transaction – 750,000 troy ounces worth more than $1.24 billion – led to speculation that it was either a mistake by a trader or that an entity wished to manipulate the market lower.

Such large trades have frequently been seen at month and quarter beginning and ends. Yesterday was the last trading day of the month. They have also been seen when Ben Bernanke has been making important statements regarding the dollar and the outlook for the US economy.

The nature of the massive sell order, one of many seen in recent months, suggested that the seller was not motivated by profit and may have had other motives. Such large trades are rarely conducted amid very thin trading volumes.

Trading yesterday was expected to be quiet as market participants in China and Japan were out on holiday and many European traders were preparing for May Day holidays today.

“No one who has the account size and the money to trade thousands of gold contracts would do it in one transaction; that’s just stupid,” said one trader.

$75.9 million deposit…Hedge Fund, Institutional Money?

It seems likely that the seller was either a large hedge fund or institution as the collateral required to purchase 7,500 contracts is high. The seller would have had to have deposited $ 75.9 million in cash with a broker.

Silver 3 Day Chart – (Bloomberg)

There was a suggestion in the Reuters Global Gold Forum that the selling may have been due to algorithm trading or computer driven.

The trade could be as a result of the shift to electronic trading. Computer trading systems are vulnerable to input errors, as they do not ‘question’ the order before executing the transaction.

By contrast, when most order flow would pass through the Comex floor where human traders processed the deals, potential errors stand higher chances of being intercepted and there is a higher level of transparency.

“You would definitely [verify a trade this big] before you executed it,” said one Comex floor broker.

However, the trade is unlikely to have been a keystroke error as silver also saw substantial selling at the same time and similar price falls.

The Sellers True Motivation

This suggests that the seller wished to see gold and silver prices lower.  Some traders suggest that there may be High Frequency Trading (HFT) programs that can see where stop loss orders are placed and sell in order to force stop loss selling – then buying back and thus making a quick profit.

It will further fuel allegations that certain Wall Street banks, either alone or in conjunction with the Federal Reserve and US Treasury, are intervening in and manipulating prices in the precious metal markets.

Source(s):

http://www.goldcore.com/goldcore_blog/manipulative-gold-%E2%80%98fat-finger%E2%80%99-or-algo-trade-worth-124-billion-usd