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Fat-finger error

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A fat-finger error is a keyboard input error in the financial markets such as the stock market or foreign exchange market whereby an order to buy or sell is placed of far greater size than intended, for the wrong stock or contract, at the wrong price, or with any number of other input errors.[1][2][3]

Automated systems within trading houses may catch fat-finger errors before they reach the market or such orders may be cancelled before they can be fulfilled.[4] The larger the order, the more likely it is to be cancelled as it may be an order larger than the amount of stock available in the market.

Fat-finger errors are a product of the electronic processing of orders which requires details to be input using keyboards. Before trading was computerised, erroneous orders were known as "out-trades" which could be cancelled before proceeding. Erroneous orders placed using computers may be harder or impossible to cancel.[4]

Deadlines for review & cancellation

In order to have legal certainty at the stock exchange, all exchanges have tight deadlines to request a review and cancellation, if possible. At the NYSE, requests for review must be received within thirty (30) minutes of execution time.[5]

At the NYSE-Euronext Liffe, "Where a member has executed an Erroneous trade, he will have a maximum of 30 minutes from the time of execution within which he may contact Market Services to request aninvalidation[6]".

The Frankfurt Stock Exchange in Germany applies the following rules: in case of transactions in securities traded in Continuous Auction, the Mistrade application shall be submitted within two trading hours upon receipt of the execution confirmation pursuant to § 2 Paragraph 1 Clause 2. As far as transactions of securities other than structured products, which are traded in Continuous Auction, are concerned, the application term ends according to Clause 1 upon closing of trading hours for that day, so the mistrade application has to be submitted within half an hour after the closing of trading hours at the latest.[7]

Examples

Fat-finger errors are a regular occurrence in the financial markets:

  • In 2006, a fat-finger error by a trader at Mizuho Securities in Japan caused the firm to short sell a stock in an error that cost the firm 40 billion Yen to unwind.[3]
  • In 2014, a Japanese broker erroneously placed orders for more than US$600bn (£370bn) of stock in leading Japanese companies, including Nomura, Toyota Motors and Honda which was subsequently cancelled. If the order had been fulfilled it would have exceeded the value of the economy of Sweden.[8][9]
  • In 2015, a junior employee at Deutsche Bank whose superior was on vacation confused gross and net amounts while processing a trade, causing a payment to a US hedge fund of $6bn, orders of magnitude higher than the correct amount.[10] The bank reported the error to the British Financial Conduct Authority, the European Central Bank and the US Federal Reserve Bank, and retrieved the money on the following day.[10]
  • In 2016, the German FOCUS magazine published an article regarding a 163 Million EUR erroneous trade case in which BNP Paribas was allegedly involved in.[11] The bank had sold securities worth EUR 326,400 to an investor, but according to the bank, the actual value of the securities was EUR 163 Million EUR. The error remained unnoticed for several days, with BNP even reconfirming the original price. A trade-cancellation was only possible the next day, according to prevailing trading error rules.
  • In 2016, it was believed a fat-finger error cause the British pound to drop 6% in just a few minutes to $1.1841, its lowest value for 31 years.[12]

See also

References

  1. ^ Fat Finger Error. Investopedia. Retrieved 7 October 2014.
  2. ^ Fat fingers. Nasdaq. Retrieved 7 October 2014.
  3. ^ a b ft.com/ lexicon. Financial Times. Retrieved 7 October 2014.
  4. ^ a b Gorham, Michael; Nidhi Singh. (2009). Electronic Exchanges: The Global Transformation from Pits to Bits. Burlington: Elsevier. p. 299. ISBN 978-0-08-092140-2.
  5. ^ "Rule 7.10. Clearly Erroneous Executions" (PDF). 2014-06-19. Retrieved 2016-11-20.
  6. ^ "BULLETIN DE PARIS No. 2007 – 030". Euronext Liffe. 2007-09-25. Retrieved 2016-11-28.
  7. ^ "Conditions for Transactions on the Frankfurter Wertpapierbörse" (PDF). Frankfurt Stock Exchange. 2015-11-30. Retrieved 2016-11-20.
  8. ^ Japan stocks rattled by $617bn 'fat finger' trading error. BBC News, 2 October 2014. Retrieved 3 October 2014.
  9. ^ $617 Billion in Japan Stock Orders Scrapped After Error. Anna Kitanaka and Toshiro Hasegawa, Bloomberg, 1 October 2014. Retrieved 7 October 2014.
  10. ^ a b Faux, Zeke (2015-10-19). "Deutsche Bank Error Sent $6 Billion to Fund in June, FT Reports". Bloomberg.com. Retrieved 2015-10-20.
  11. ^ "Bank-Irrtum zu seinen Gunsten". Focus. 2016-06-05. Retrieved 2016-11-22.
  12. ^ Treanor, Jill; Davies, Justin McCurry Rob (2016-10-07). "Bank of England investigating dramatic overnight fall in pound". The Guardian. ISSN 0261-3077. Retrieved 2016-10-07.
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