Was There a Rhyme or Reason?

Hawaii offers a unique time zone to monitor the markets globally. Gold, for example, trades 24 hours a day and closes for the weekend on Friday at 5 o’clock in New York, which corresponds to noon in Honolulu.

Trading resumes Monday morning in Australia. This corresponds to noon in Honolulu, Hawaii. From there trading moves into Hong Kong, and by 10 o’clock in the evening, one can watch the opening action in London when their opening bell rings at 9 AM.

Typically, unless a major event has occurred between the closing New York and the opening in Australia on Monday, gold prices will trade in a fairly narrowly defined range. That was the overall characteristic yesterday as gold resumed trading in Australia Monday morning.

Yesterday’s open in Australia resulted in nominally higher pricing with gold trading up about a dollar on the day. Throughout the trading day, gold prices continue to oscillate near that value, plus or minus a couple of dollars. However, when the London exchange opened, traders quickly realized something was dramatically different. Immediately following the opening bell in London, gold prices plunged dramatically and within the span of a couple of minutes were trading $15 lower on the day.

What was unusual about this occurrence is there was no real fundamental news to warrant the extent of selling in the markets, which left traders and analysts perplexed. Reuters news service immediately reported that it appears a large sell order was placed by a hedge fund liquidating a percentage of their long gold positions.

As more time passed and more information became available, it became increasingly clear that this price decline was something out of the ordinary. It seems as though a single order selling 1.8 million ounces of gold was the dynamic force behind this dramatic selloff.

According to Bloomberg News, "Gold sank like a stone at 9 a.m. in London after a huge spike in volume in New York futures that traders said was probably the result of a "fat finger," or erroneous order.”

In an interview with Bloomberg News, David Govett, head of precious metals trading at Marex Spectron Group in London, said of the spike in volume. “No one has a clue, apart from the unfortunate individual that pressed the wrong button. Thin activity and automated trading may exacerbate such moves.”

Bob Haberkorn, a senior market strategist at RJO Futures, was quoted by Bloomberg as saying, “the mysterious plunge has the market spooked.” 

The Muppet Caper

As if Kermit the Frog or Miss Piggy had anything to do with last night’s plunge in gold prices, new stories began to report that this trading activity could have been due to a trader incorrectly entering the quantity on a sell order, commonly referred to as a Muppet trade.

In an interview with Bloomberg News, Ross Norman, chief executive officer of Sharps Pixley Ltd., a London-based precious metals dealer, said “This bears the hallmarks of a fat-finger ‘Muppet’ -- a trade of 18,149 ounces would be a very typical trade, but a trade of 18,149 lots of a futures contract (which is 100 times bigger) would not be,” 

As the dust clears and more information becomes available about last night’s trading activity, one common thread appears to run throughout these new stories. Last night’s liquidation of 1.8 million ounces was most likely the direct result of an erroneous order placed on the market.

It will be interesting to see how gold prices react over the first few days of this week as traders and analysts attempt to incorporate this new pricing into their current models.

Wishing you as always, good trading,