This Monday, a few shorts days after the Knight algorithm decided to do what it and the Fed does best, and go on a shopping spree, gobbling up $7 billion in stocks in 45 minutes and in the process almost destroying its host like any self-respecting virus, something weird happened with the 1.20-pegged EURCHF in the minutes after the marked closed: it shot up for no reason, only to slam right back down. Some speculated it was a fat finger.
Fat finger EURCHF?
— zerohedge (@zerohedge) August 6, 2012 
Turns out they were right. Only with a twist, as first it appears it was purely human error, which in turn set of an avalanche of algo trades which had no idea why they were buying, except that someone else was buying, so they had to be buying: the purest definition of momentum trading insanity, where one buys or sells with no rhyme or reason, but simple because someone else, marginal enough, is moving the market. And that is why every single capital market: stocks, bonds, commodities and FX, is always one trade away from total collapse.
When the incident happened, traders had speculated that it was a faulty algorithmic system at RBS that caused the run-up in the euro, although that turned out to be not the case.
"RBS algo went berserk," said one UK-based trader at the time it happened.
Another trader, who spoke to Reuters on Monday, had the impression that an RBS algo took euro/Swiss franc from the 1.2015 level to he 1.2050 bid, and then the U.S. algorithmic systems took over.
As a result of the spike in euro/Swiss, there was a lot of confusion as to whether the high of 1.20928 francs was valid. That prompted EBS to issue a statement to traders late on Monday.
As for the primary catalyst: it was simply the bank which has time after time proven it is the most incompetent (and nationalized) banking institution in the world: RBS.
An error by a U.S.-based trader at RBS Securities caused a sharp and unexpected rise in the euro against the Swiss franc on Monday, a spokesman for the bank told Reuters.
The transaction caused a stir because it triggered a wave of computer-generated, or algorithmic trades from other banks. It took place on the EBS foreign exchange platform and briefly pushed the euro up near a five-month high against the Swiss franc.
The mistake occurred amid heightened concern over market mishaps after computer trading gone awry in the U.S. stock market nearly caused Knight Capital Group Inc to go under. However, an RBS spokesman said the incident was contained with quick action.
Of course, with peak animosity toward algo errors of any kind, RBS would hardly admit it took was the victim of runaway technology and would rather throw some carbon-based trader under the bus.
The ultimate driver of the move is, however, largely irrelevant. The markets continue to be broken, and are just getting worse. Every day it is something, whether in currencies, in stocks, in commodities, or heaven forbid, bonds. And one of these days, there will be no fixing the algo-driven problem as SkyNet finally takes its revenge.