by Pam Martens and Russ Martens, Wall St On Parade:

Two U.K. regulators, the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA), announced this morning that they have leveled fines totaling $78.5 million against Citigroup’s European trading arm, Citigroup Global Markets Ltd. (CGML). See here and here. The fines relate to a $300 billion flash crash in European stock markets on May 2, 2022.

Citigroup is the parent of the fourth largest federally-insured bank in the United States, Citibank.  During the 2008 financial crisis, Citigroup imploded and became a 99-cent stock because of its high-risk market activities. It received over $2.5 trillion in bailouts and cumulative loans – the largest bailouts in global banking history.

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The U.K. regulators have today put the blame for that May 2, 2022 flash crash on a trader on Citigroup Global Markets’ Delta One trading desk, who, according to the regulators’ scenario, entered a $444 billion trade into the Citigroup system instead of the intended $58 million trade. According to this scenario, the trader placed the monetary amount of the trade he wanted to execute in the quantity box on his trading dashboard instead of in the monetary box.

Today, the U.K.’s Prudential Regulation Authority provided extensive details about the long, failed history of Citigroup in bringing this trading unit into compliance. In one particularly alarming section, it explained how traders were able to override risk limits. It wrote:

“In the period January 2020 to February 2021, Equity Derivative traders made approximately 985 changes to the CitiQuote Max Notional MMC, including 31 notional [face amount of trades] increases, without obtaining RCC [supervisory] approval.” MMC stands for Minimum Mandatory Control.

In Appendix A of the PRU report, it provided this scenario about how the May 2, 2022 trade at the Delta One desk at Citigroup went off the rails. It wrote:

“On the morning of 2 May 2022 (a UK Bank Holiday), CGML received a request to sell 24,800 lots of the MSCI World Index futures (a stock index which tracks stocks worldwide), primarily priced on an agency basis. Between 08:47 and 08:54, a trader on the Delta One desk set about booking a basket of equities to hedge a proportion of CGML’s European exposure to the MSCI World Index. This required a decomposition of the Index, detailing the constituents of the Index and their relative weighting within it. Having done this, the notional value for each component stock could be calculated. There were at least two methods available to the trader to do this, either using PTE directly or using a decomposition tool called SOLA. However, at this moment the SOLA tool was unavailable, meaning the trader was unable to use this tool to construct the constituents of the Index. Therefore, at 08:54 the trader manually entered the European element of the trade directly into PTE by selecting a pre-loaded index, the MSCI Europe (ex UK).

“In the PTE order management system, a trader is required to enter either the US$ ‘Notional’ of the index, or else the ‘Quantity’ of index units, to be bought or sold. Either of these fields can be populated to determine the size of the trade. The trader at that time was dealing only with the European stock portion of the MSCI World Index (i.e. excluding the UK, US, and Japan) and planned to enter an order for US$58mm notional. However, rather than entering 58 million into the ‘Notional’ field, which would have created a basket of equities with notional of US$58mm, 58 million was entered into the ‘Quantity’ field. This had the effect of creating a basket equivalent to 58 million units of the MSCI Europe (ex UK) index (‘the Index’), which equated to creating a basket of 349 stocks, across 13 European countries, with a total notional size of US$444bn. At this point, the erroneous basket was not visible to the market.”

The U.K. regulators reported that the error was detected inside Citigroup before the bulk of the dollar amount was executed.

According to news reports on May 2, 2022, the flash crash caused by Citigroup’s trading error plunged Sweden’s benchmark index, the OMX, by 8 percent at its low on the day. The index later recovered to close with a loss of just under 2 percent. The plunge caused an immediate ripple effect that briefly spread to other European stock markets.

El Pais, a leading newspaper in Spain, reported at the time that “European stock markets as a whole lost over €300 billion as a result of the so-called Nordic flash crash.” That was the equivalent of approximately $315.5 billion at the time.

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