You’ve just experienced your first fat finger trade. It’s much 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 pass, and it’s time to pull the trigger. In your eager anticipation of profits, you’ve already spent your day’s money in your head, and you mistakenly order 9100 shares @ $75/share, costing you $682,000. Oops. Panic sets in, you can’t get a hold of your broker, and you see your life falling apart before your eyes.
A $622 million buy order, $6 billion dumped into the wrong account, and 500,000 British pounds lost in a transaction are the stuff of nightmares. A fat finger trader is precisely that: a trade is executed mistakenly by the wrong button press.
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 is that it won’t end well if you rush to get in and out of trades.
As a result, ensure you’re not panicking to get into trades. And have your hotkeys set up if you want to be in and out fast.
The Grave Consequences
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 unfamiliar.
Fat-finger trades can set a chain reaction of events, similar to the domino effect. The downward spiral can sometimes be catastrophic, such as during the stock market’s flash crash in 2010.
Time Is Not on Your Side
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 execution to request a review and cancellation.
With that in mind, let’s look at some trades that were made in error and the effect of that. Yes, even the “pros” make fat finger trades now and again.
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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 was was about four times the company’s market capitalization. Luckily, the error was caught on time before execution.
- Fast-forward to 2010. After one too many drinks on the green, Steve Perkins ordered seven million barrels of crude for 345 million pounds. Or 69% of oil trading globally at that point. The cost was 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 talked about the importance of having systems or checks and balances in place before you make a trade?
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, such as pre-trade order size limits. 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 undergo 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; look at Deutsche Bank. Deutsche Bank has a “four-eye” policy in the heart of Germany. Essentially, it means every trade needs to be scrutinized by another person before execution. I had to point out the obvious, but it 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 trade 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, which lets you program square LCD buttons with labels. This can be extremely helpful in 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 and 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?