Stock markets crash repeatedly, seemingly for no reason, and often recover within minutes, known as a “flash crash.” This is what happened at the beginning of May 2022. For no good reason, prices in Europe fell within a few minutes and, meanwhile, 300 billion euros in market value had evaporated before the markets calmed down.
An investigation by British authorities has shown that a Citigroup trader was behind it. . As reported by the financial news agency Bloomberg, regulators have fined the bank almost $78 million (€72 million).
Said stockbroker was on duty in London on May 9, 2022, a public holiday in Great Britain. The trader wanted to create a so-called hedge for an internal trading group, a protection against losses from other investments. In this case it was the MSCI World index.
Normally, according to Bloomberg, merchants have a special tool to carry out this type of transaction. Just not in this case. Therefore, the trader prepared a basket of stocks that can also be found in the index.
A Trader Accidentally Traded a Giant Basket of Stocks
And this is exactly where the fatal error occurred. Each transaction in the bank's system is based on a par value or number of shares; For example, if a trader wants to trade shares for 5,000 euros or 5,000 shares. Depending on the course, a gigantic difference.
And the Citigroup trader actually wanted to put together a basket of stocks worth $58 million. But the trader accidentally created a basket of 58 million shares: 349 stocks from 13 countries, worth a whopping $444 billion, almost 80 times more valuable than the initially planned transaction.
The bank's alarm systems were activated immediately. According to Bloomberg, the trader faced a total of 711 warnings and then quickly ignored all the ones he could ignore. In the end, according to Bloomberg, most of the operations were blocked.
Entry errors cost Citigroup traders nearly two years of sales
However, the retailer began sales that ultimately amounted to $1.4 billion, enough to disrupt the markets and send them into a tailspin. That was shortly before nine in the morning.
The bank's risk management teams did not respond to system warnings in a timely manner. It was not until three quarters of an hour later that risk managers reported the transaction. At that point, the trader realized the mistake and, if possible, canceled the order.
However, Citigroup lost $48 million as a result. Now, two years later, the bank has to pay for it. This is a major setback for Citigroup, writes Bloomberg. For years, the institute has been trying to compete with other Wall Street giants, such as Goldman Sachs, with its internal operations. or JPMorgan to open.
But this is only moderately successful. As a result of the incorrect transaction, the bank is now even further behind. The bank's commercial division generates an average of about $68 million a year. This means that almost two years of sales have been lost due to losses and sanctions from British regulators.