(Bloomberg) — To a Citigroup Inc. trader. in London, the morning of May 2, 2022 went from bad to worse.
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It was a public holiday in Britain, so it should have been a quiet day at the markets. Just before 9 a.m., Citigroup’s Delta One trading desk employee – 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 assemble the basket of shares. That’s where things started to go wrong.
In Citigroup’s systems, traders have the option to either enter the notional value of a trade they wish to execute or enter the number of index units they wish to trade. On that day in May, the trader wanted to create a basket of stocks worth $58 million, but he accidentally entered those 58 million into the quantity field, creating a massive $444 billion basket containing 349 stocks from 13 different countries.
The Wall Street giant’s systems immediately issued hundreds of alerts, eventually causing some – but not all – trades to fall through. Still, about $1.4 billion worth of shares were sold on European stock exchanges.
The markets immediately began to go haywire. Within minutes, the merchant realized the error and canceled the order. But the damage had already been done: the blunder had led to a five-minute sell-off in European shares, wreaking havoc on stock markets stretching from France to Norway.
Two years later, British regulators on Wednesday unveiled the outcome of their long-running investigation into Citigroup’s actions that day, saddling the bank with £61.6 million ($78 million) in fines for the mistake. Their findings offer the first insight into how a big-budget mistake – along with a host of risk management mistakes – culminated in a sudden crash that at one point wiped out €300 billion ($325 billion) of European equities.
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It’s the latest blow for CEO Jane Fraser, who has spent years trying to strengthen the credit giant’s underlying risk management systems.
“These failings led to the execution of more than a billion pounds of erroneous orders and threatened to create a disorderly market,” Steve Smart, joint executive director of enforcement and market supervision at the Financial Conduct Authority, said in a statement. “We expect firms to look at their own controls and ensure they are appropriate given the speed and complexity of the financial markets.”
The trader has now left Citigroup, according to people familiar with the matter. A bank spokesperson declined to comment.
Fifteen minutes
Just before the trader started setting up the erroneous trade, a separate team at Citigroup was figuring out how to handle their responsibilities for the day.
The bank’s algorithmic service desk, which normally oversees the real-time monitoring of internal executions, had decided to transfer these responsibilities to the electronic execution desk as staff were on planned leave that day.
When the trader first entered the erroneous transaction, he was confronted with a wall of 711 warning messages. He quickly ignored the ones he could and the order was placed at 8:56 am
Trades were executed on exchanges in Austria, Belgium, Denmark, Finland, France, Germany, Italy, Netherlands, Norway, Portugal, Spain, Sweden and Switzerland, leading to a sudden drop in European indices. Within Citigroup, executives were puzzled by the dip and consulted news reports to figure out what was behind it.
By 9:10 a.m., the trader had canceled the order, leaving Citigroup with a $48 million loss.
The electronic foreclosure desk had received hundreds of warnings about the erroneous transaction, but failed to escalate it. A separate team, known as the e-commerce risk and control team, also escalated the incident to the electronic execution desk, but not until 9:31 am.
“The proximate cause of the trading error was a manual entry error by the trader,” the Bank of England’s Prudential Regulatory Authority said in its findings on Wednesday. “The error was subsequently identified not by any of the company’s risk functions dedicated to real-time monitoring of the company’s transactions, but by the trader approximately 15 minutes after the transaction was entered into the company’s systems.”
Hard, soft blocks
Citigroup’s systems had two lines of defense against these types of erroneous transactions: soft blocks and hard blocks.
The bank sets a series of thresholds for each type of block. If a transaction triggers one of these, a pop-up will appear. Soft blocks can be overwritten, but hard blocks cannot.
Citigroup had increased some of these thresholds to account for periods of increased volatility during the pandemic. But two years later, those limits still hadn’t been reset.
Yet it was these hard blockages that prevented some trade from taking place. But British regulators noted on Wednesday that Citigroup in the US has had rules in place since 2013 that would have stopped all trading.
“We are pleased to have resolved this issue from more than two years ago, which stemmed from an individual error that was identified and corrected within minutes,” Citigroup said in a statement. “We have taken immediate steps to strengthen our systems and controls and remain committed to ensuring full regulatory compliance.”
The penalties come as a blow to Citigroup’s equities trading unit, led by Fater Belbachir. The division has tried to climb the stock trading rankings for years, but remains far behind rivals such as Goldman Sachs Group Inc. or JPMorgan Chase & Co.
When regulators spelled out the size of the fine Citigroup should face for the failures, they said they believed that the trading desks within the bank’s Delta One division, which used the order management system underlying the blunder, committed approximately 612 million dollars in revenue. the nine years prior to the errant trade, or an average of about $68 million per year.
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That would mean that, not counting the fines and trading losses that day, the erroneous trades would cost these agencies almost two years of revenue.
–With help from Laura Noonan.
(Updates with more information about the trader in the tenth paragraph.)
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