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Business News/ Markets / Small errors may have huge consequences; Why you must be aware of fat-finger trades
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Small errors may have huge consequences; Why you must be aware of fat-finger trades

A 'fat finger trade' is a minor mistake but can have a huge consequence. It is an erroneous action due to a mouse misclick or punching a wrong key.

FILE PHOTO: A pedestrian walks past an electronic board showing the stock market indices of various countries outside a brokerage in Tokyo, Japan, February 3, 2016. REUTERS/Yuya Shino (REUTERS)Premium
FILE PHOTO: A pedestrian walks past an electronic board showing the stock market indices of various countries outside a brokerage in Tokyo, Japan, February 3, 2016. REUTERS/Yuya Shino (REUTERS)

Not every 'small' mistake is small, for a mouse misclick or punching a wrong key on the keyboard can cause a mammoth loss to one and a huge windfall gain to the other.

Known as the 'fat finger' error in trading parlance, it caused a trader a loss of ₹250 crore on June 2. "A ‘fat finger’ trade, hit the NSE’s derivatives segment late on Thursday that could have caused a loss of Rs 200-250 crore to an unknown broking house which placed the order," said a Times of India report.

The report further added that on June 2, a trader sold 25,000 lots of Nifty call options at 14,500 strike at prices as low as ₹0.15. At that time, the market price for this contract was about ₹2,100. Each lot of Nifty contract is for 50 numbers. So, the estimated total loss is somewhere around ₹250-260 crore.

What is the fat finger trade?

A 'fat finger trade' is a minor mistake but can have a huge consequence. It is an erroneous action due to a mouse misclick or punching a wrong key which results in a loss of one and gain of the other. It occurs when a trader places an order for buying or selling a contract.

While placing the order, either the number of the lot can be wrong, the price can be wrong, or the name of the contract can be wrong. In simple words, the input of the trade can be wrong.

Not all fat finger errors have huge consequences and they can be contained if detected quickly. However, if committed by a big institution, it can trigger even a chain reaction which can cause a market crash and trigger circuit breaks which can get the trading stopped.

There have been many such incidents in the past. As per a Telegraph report, in 2001 brokerage firm UBS sold 610,000 Dentsu shares at ¥6, instead of ¥610,000. UBS had to suffer a loss of $100m.

A ‘fat finger’ incident occurred in October 2012 in India which became quite famous. As per media reports, a trader at a brokerage firm Emkay Global Services mixed up the volume and price columns on trade and punched in an erroneous sell order for ₹650 crore worth of Nifty stocks. The order caused a 15 percent drop in the Nifty in a jiffy, triggering the circuit breaker and temporarily shutting down the exchange.

The brokerage firm lost over ₹50 crore and investors lapped up the unexpected gain. Despite Emkay's requests, NSE didn’t cancel the trade.

There are many such examples across the markets and with time, several broking firms and exchanges have developed in-house systems to spot and stop such trades.

While some exchanges cancel such trades, some involved parties settle it among themselves. Also, some broking firms have insurance to cover such losses.

Why is it important for you?

It must be understood that fat-finger trades have the potential to cause unprecedented harm. Traders should understand that even a small error can be fatal not only for them but for the market too as it may erode or inflate the market capitalisation of stock and can trigger circuit breaks in the stock.

Investing and trading is risky and fat-fingers trade makes it riskier to an unimaginable degree. One wrong input can wipe out your entire life's earnings!

Apply tools available with your broking firms and exchanges to prevent such mistakes. You can also set limits for your trade or you can rely on algorithms to execute big trades instead of getting it done manually by the human beings to ward off the risk of fat-finger trades.

We explain here how can one deal with the stock market losses. 
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We explain here how can one deal with the stock market losses. 

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Published: 03 Jun 2022, 01:47 PM IST
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