8. Crashes, Trading Glitches, and Fat-Finger Trades

“It is a socialist idea that making profits is a vice; I consider the real vice is making losses.”

—Winston Churchill1

Sudden, large changes in prices periodically occur in financial markets. Many of these large price moves reflect reaction to news as financial theory would predict. However, some of the most extreme price moves—akin to “black swans” in popular parlance—reflect more the behavior of traders or poorly designed market structures than the arrival of new fundamental information. Ironically, this means that some of the biggest moves in the market are in fact, mistakes. These trading-induced black swans have important implications for market participants and policymakers alike. Although ...

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