Traders at the Tel Aviv Stock Exchange were left stunned last Thursday when shares of Elbit Systems, a major Israeli defense contractor, nosedived by 33% in the middle of the trading day. The shocking drop had nothing to do with breaking global news or peace deals — it was the result of a simple but very costly typo.
While some might have assumed a major development — perhaps an end to hostilities in Ukraine or a sudden halt to the Israel-Hamas war — the explanation turned out to be far less dramatic. A single trader entered a sell order incorrectly and didn’t fix the mistake for nearly six minutes.
The blunder led to a large order of 66,000 shares being offered at a drastically reduced price, which instantly activated the Tel Aviv Stock Exchange’s built-in volatility controls, safeguards intended to shield the market from such mistakes.
Despite having nearly six minutes to reverse the error, the trader did not take action. The faulty order went through, and about $17.3 million worth of stock changed hands with Elbit’s price dropping 33%. Eventually, that trade was voided, curbing the losses, and the stock recovered to its previous level.
Each trading day on the exchange starts and ends with auctions, while the hours between are filled with continuous trading. Investors submit orders to buy and sell at set prices, and trades happen when those prices align.
To illustrate, if someone lists 8 shares for sale at $1,000 each and a buyer offers to purchase 5 at that price, the buyer pays approximately $1,350, and the remaining 3 shares stay available for others to purchase.
Buyers can instantly match available sell orders at the listed price or place lower bids that may only execute if matching offers appear later. Most of the time, this system works seamlessly. But every so often, someone places a significantly incorrect order that triggers chaos in the market.
To prevent catastrophic trades, the exchange relies on two major tools: a system that temporarily pauses trading during extreme price swings, and an option that allows erroneous trades to be canceled if specific criteria are met.
Trading halts are triggered when a stock’s price shifts too sharply compared to either the previous closing price (static) or the most recent trade (dynamic). These limits differ depending on the stock index. For instance, TA-35 stocks halt at a 7% static or 4% dynamic move; TA-90 halts at 8% and 4%, respectively. SME60 and growth indices require a 9% static or 5% dynamic swing. When this happens, a new 5–6 minute auction begins.
If the price change reflects legitimate market movement, trading resumes near that adjusted level. But if the movement was an error, the trader has a brief opportunity to cancel before incurring further damage.
The other protective measure enables traders to request trade reversals, but only if three conditions are satisfied: the price must have shifted by at least 6% dynamically for TA-35 stocks (or 12% for others), the total loss must exceed around $13,500, and the trader must report the error within 20 minutes of execution.
If those requirements are met, the exchange usually classifies the trade as a mistake and cancels it. The cost of such a cancellation is roughly $2,700 plus tax. The exchange also has the discretion to approve reversals that don’t fully meet the thresholds, though it rarely does so for trades that fall far outside the criteria.
Back in 2022, the exchange’s board agreed on new definitions for what constitutes an erroneous trade. However, those changes still await approval by the Securities Authority. Importantly, the criteria for trade cancellation are stricter than the volatility controls, which means most mistaken trades aren’t canceled unless the damage is substantial — this is more common in derivative trades or mismatched securities.
In the Elbit case, the trader submitted a sell order with a price set more than 90% lower than the going rate — a deal worth about $27 million under normal circumstances. At the time, there were around 2,000 buy orders on the books, priced just slightly below market, from 0.1% to 4% discounts.
Those buy orders were filled immediately at their respective prices. But once the stock dropped past the 4% threshold, the exchange’s volatility mechanism halted further trading. Nevertheless, 64,000 shares were still up for sale during the auction. For unknown reasons, the trader chose not to pull the order.
The shares were quickly snapped up at prices reflecting the 33% decline, completing a deal that could have cost the trader roughly $8.6 million. Shortly after, the trader submitted a request for cancellation.
The exchange refused to reverse the initial trades that occurred before the volatility mechanism kicked in, since the price drop hadn’t crossed the 6% mark. This left the trader with a loss between $13,500 and $16,200. However, the more damaging transaction involving the 33% plunge was canceled. The trader was also fined an additional $2,700 — a penalty that could have been avoided by canceling the trade earlier.
Once trading resumed, a quick-thinking investor placed a buy order at 1,000.1 — just a fraction higher than the erroneous price, but still well below the pre-mistake level. Three separate sellers executed trades at that price, offloading five shares and losing a combined $675. These trades weren’t voided, most likely because they were triggered by automated systems like stop-loss orders.
The stock rapidly regained its lost ground, and the surge itself triggered another halt due to volatility, this time on the way back up.
The sudden dip also rattled related instruments such as TA-35 index options and ETFs that include Elbit Systems in their portfolios. The index itself dropped by about 2%. Professional traders working with options likely recognized the brief mispricing and held steady, while less experienced ETF investors may have reacted impulsively, selling during the dip and possibly locking in avoidable losses. It’s still unclear whether the episode caused significant harm to index-based products.
When prices swing sharply without warning, investors should take a moment before reacting. Often, these swings stem from isolated mistakes and are later corrected. Before making a move, it’s wise to check if there’s genuine news or if the action is tied to a single error.
Moreover, if someone manages to scoop up shares from a mistaken trade, they should be cautious about selling them immediately. If the trade is later canceled, they’ll find themselves in debt — forced to repurchase shares at market prices to settle their account. In short, if a sudden profit looks too perfect, it probably comes from someone else’s mistake — and may disappear just as quickly.
{Matzav.com}
