You’ve just experienced your first fat finger trade. It’s a lot worse than when you accidentally hit X instead of O while epic gaming. You woke up early and meticulously took the time to plot your trendlines and areas of interest. You’re waiting patiently to buy 100 shares of GameStop at $75/share. Two hours go buy and it’s time to pull the trigger. In your eager anticipation of profits, heck you’ve already spent your day’s money in your head, you mistakenly order 9100 shares @ $75/share, costing you $682,000. Oops. Panic set’s in, you can’t get a hold of your broker, and you see your life falling apart before your eyes.
What Is a Fat Finger Trade?
A $622 million buy order, $6 billion dumped into the wrong account, 500,000 British pounds lost in a transaction; this is the stuff of nightmares. A fat finger trader is precisely that; a trade executed mistakenly by the wrong press of a button.
Or, in my case and likely Roses’ as well, it’s the “cat-finger” trade. If you have animals “helping” you trade, that can be scary. And another thing, if you’re rushing to get in and out of trades, that won’t end well.
As a result, make sure that you’re not panicking to get into trades. And have your hot keys set up if you want to be in and out fast.
The Grave Consequences of Inputting the Wrong Data
The circumstances can be dire, especially in today’s times of increasing algorithmic trades. This type of trading uses everything from advanced to complex mathematical models and formulas to execute lightning-fast trades if you’re not familiar.
Fat-finger trades can set a chain-reaction of events in place, similar to the domino effect. In some cases, the downward spiral can be catastrophic, such as during the stock market’s flash crash in 2010.
Time Is Not on Your Side When You Make Fat Finger Trades
You don’t get a get-out-of-jail-free card with every fat finger trade you make. Many if not all exchanges have specific deadlines to meet if you want to review and cancel your erroneous trade. Take the NYSE, for example; you only have 30 minutes from the time of execution to request a review and cancellation.
With that in mind, let’s take a look at some trades that were made in error and the affect that came from that. Yes, even the “pros” make fat finger trades now and again.
Fat Finger Stock Market Crash and a Few of the Worst Fat Finger Trades in History
- In 2015, a junior trader at Deutsche Bank processed the wrong figure and mistakenly put $6 billion into a U.S. hedge fund.
- The London Stock Exchange had its tryst with fat-finger trading in the same year, seeing the FTSE 100 fall drastically. The cause? A fat finger trade executed on a basket order. The fallout was a trading suspension in nine companies, including HSBC Holdings and BP plc (ADR). When the dust settled, the trader lost 500,000 pounds on the transaction.
- In October 2014, a fat finger trade by a dealer in the Tokyo Stock Exchange led to a $711 billion placement to buy blue chips such as Toyota Motor Corp. An easy mistake to make, the trader entered the price and volume in the same column. Luckily the trade didn’t go through. If it did, the trader’s employer would have faced a bill around the size of Switzerland’s economy.
- Japan’s Mizuho Securities wanted to sell one share of J-Com for 610,000. Instead, they placed an order to sell 610,000 shares of J-Com for 1 yen each. Despite catching the error, they couldn’t cancel the trade because of a technical glitch at the stock exchange. Ouch!
- In 2001, an input error led to an 8.1 billion-pound order placed to buy shares of Autonomy. At the time, the trade value about four times the market capitalization of the company. Luckily, the error was caught on time before execution.
- Fast-forward to 2010. After one too many drinks on the green, Steve Perkins decided to order seven million barrels of crude to the tune of 345 million pounds. Or, 69% of oil trading globally at that point. The cost, 7.3 million pounds, a 5-year ban from trading and enrollment to an alcohol rehabilitation program courtesy of his employer.
Using Systems to Prevent Fat Finger Trades
Now on to the million-dollar question, how do institutions protect themselves from fat finger trades? Do you recall previous blog posts where I talk about the importance of having systems or checks and balances in place before you make a trade?
Well, that’s precisely what the heavy-hitters do; they use systems. Automated systems, to be exact. Remove the human, remove the error.
Automated systems within trading houses may catch fat-finger errors or cancel them before they reach the market. Some brokerage firms have built-in controls in place, such as pre-trade order size limits. I think this is smart as trades above a specific size limit are blocked. And if a huge buy or sell order gets placed, the trader must go through a rigorous back-office confirmation process. I imagine that the traders and companies in the situation above wished that a second line of defense was in place.
I’m a real fan of systems that remove the human element. Even another layer of “human” assurance can fail; just look at Deutsche Bank. Nestled in the heart of Germany, Deutsche Bank has a “four-eye” policy. Essentially, it means every trade needs to be scrutinized by another person before execution. I had to point out the obvious, but it clearly didn’t work back in 2015 with the $6 hedge fund debacle.
How Can You Prevent a Fat Finger Trade?
Did you know 90% of traders lose because they don’t have a trading system? In other words, they trade on gut instinct, hoping and wishing the trades goes their way. When the dust settles, those who are successful in trading have a system.
You can prevent a fat finger trade when you’ve spent time learning how your broker works and how to use it. That means you need to practice. Practice will teach you how to trade stocks with confidence.
Some folks have opted for a stream deck, a device which lets you program square LCD buttons with labels. This can be extremely helpful with cutting down on errors while trading.
It’s the System That Wins
We refer to this set of rules as your system or trading plan. With a system, you are clear on your entry and exit points. This means having a trigger into and out of the trade instead of just trading the setup.
It means knowing when you will enter and exit the trade. You’re clear on profit targets as well as stop locations and use them. It’s a setup, or it isn’t. It’s a set of checks and balances in its purest form, so you don’t mistakenly rush into a trade and take the time to verify your trade criteria.
And of course, keep your cat away from your laptop!
You don’t need to be the victim of a fat finger trade. With a double-check that I’ve met my entry criteria, I enter the trade. By trading the opportunities as they are presented to me allows me not to overthink the trade. I am trading in the moment, based on solid criteria. I’m not trying to outsmart or predict what the market will do next.
Many day trading strategies work. It’s important to remember that you must find the one that closely matches your trading style to have success. This is where Bullish Bears can help. We will help you to narrow down your strategy and develop a system that works for you.
All you need is one system to make a living; what’s yours?