ZEROHEDGE: As Monday Looms, Experts Warn Japan's Half-Trillion Dollar Fat-Finger-Trade "Could Absolutely Happen" In The US

At 9:25 a.m. Tokyo time, orders for shares in 42 companies totaling 67.78 trillion yen ($617 billion) were canceled, according to data compiled by Bloomberg from the Japan Securities Dealers Association. A representative at the organization wasn’t immediately available to comment.

The biggest order was for 1.96 billion shares of Toyota Motor Corp., or 57 percent of outstanding shares at the world’s biggest carmaker, for 12.68 trillion yen through an off-exchange transaction. Toyota declined to comment. Other stocks with scrapped transactions included Honda Motor Co. (7267), Canon Inc., Sony Corp. and Nomura Holdings Inc.

“Fat finger” trading mistakes occur periodically. In 2009, UBS AG mistakenly ordered 3 trillion yen of Capcom Co. convertible bonds. Still, today’s scrapped trades were of a different magnitude.

“I’ve never heard of orders this big being canceled before,” said Ayako Sera, a Tokyo-based market strategist at Sumitomo Mitsui Trust Bank Ltd., which oversees about $474 billion in assets. “There must have been an error.”

While no harm’s been done because the orders were canceled, there should be an explanation to alleviate concerns, Sera said.

“It’s not rocket science that there was a fat finger here, but it reopens the question about accountability,” said Gavin Parry, managing director at Hong Kong-based brokerage Parry International Trading Ltd.

Recently there have been frequent spikes in the VIX index such as the ones shown in the 1 minute chart below. We drilled down to the underlying data (option prices) used in calculating the VIX and found that almost all the quotes in the near term options used in the VIX calculation suddenly widened which causes the spike. Why this happens is unknown…

A funny thing happened after Michael Lewis’s book “Flash Boys” put the structure of the U.S. stock market under a microscope in March: The whole system ran pretty smoothly, at least compared with its recent past.

Sure, the electronic cat-and-mouse trading game that Lewis called a “rigged” system and others called “market making” may not have changed much. On the bright side, however, there have been no major technological meltdowns like the one that almost bankrupted Knight Capital Group Inc. or fouled Facebook Inc.’s initial public offering in 2012, or caused an almost 1,000-point plunge in the Dow Jones Industrial Average in 2010.

Now today, that nascent confidence is being undermined in a big way after 67.78 trillion yen ($617 billion) of mistaken over-the-counter stock orders flooded Japan’s equity market. Don’t for a minute believe that the U.S. market structure is fine-tuned enough to avoid a similar situation, according to Larry Tabb, founder of research firm Tabb Group LLC.

“That could absolutely happen here,” Tabb said in an e-mail. “While we do have circuit breakers and pre-trade checks for items executed on exchange, I do not believe that there are any such checks on block trades negotiated bi-laterally and are just displayed to the market.”

…

Just a month ago, a technical error at CME Group Inc. prompted a four-hour trading halt at the world’s largest futures market, preventing buying and selling of contracts tied to major stock indexes, Treasuries, oil and gold. In May, a trading error at Barclays Plc caused split-second swings in dozens of U.S. stocks including AOL Inc. and Caterpillar Inc., people familiar with the matter told Bloomberg News at the time.

No human system is perfect and every day computer systems that interact with the markets are being upgraded and modified, said James Angel, a Georgetown University finance professor who studies market-structure issues.

“As Darth Vader said in one of the Star Wars movies, ‘Don’t put all your faith in technology,’” Angel said in an e-mail.