In the world of finance, precision is paramount. However, even in the most meticulous environments, errors can occur. One such error, known as a 'fat finger' trade, has the potential to send shockwaves through the financial markets. On September 8, a similar incident unfolded on the social media platform Channel X, where it was reported that a trader unintentionally placed an order to purchase the Sensex call option at a striking price of 67,000.

Share Market Live

NSE

Initially, this option was trading with a premium ranging from Rs 4-5. However, this accidental order triggered a sudden surge in the premium, driving it up to Rs 209. As a consequence, all sell orders entered up to Rs 209 were accepted and executed.

This incident serves as a stark reminder of the inherent risks associated with trading, particularly in the context of fast-paced and volatile markets.

In view of this let's delve further and understand what a fat finger trade is and how it can impact investors and institutions:

(Edited by : Shoma Bhattacharjee)

First Published:Sept 11, 2023 5:54 PM IST

Fat finger trade FAQs: What is it, how it affects you, ways to prevent and more

I recently read something on 'fat finger' trade. What is it and why it is in news now?

When traders and dealers in the stock markets make typing errors while entering large buy or sell transactions into their trading terminals, it results in what is known as a 'fat finger' trade.

This term is in the news because of recent incidents highlighting its impact on the financial markets.

On September 8, 2023, a suspected erroneous order resulted in a dramatic surge in the Sensex call options with a 67,000 strike, jumping nearly 5,000 percent within seconds.

Market regulator SEBI initiated an inquiry into this event.

Can 'fat finger' trade impact markets? If yes, how?

Yes, 'fat finger' trades can have a significant impact on the markets.

For example, in October 2012, a trader at Emkay Global Services mistakenly entered a wrong sell order for Nifty stocks worth Rs 650 crore.

This erroneous trade caused a 15 percent drop in the Nifty within minutes, leading to a circuit breaker and a temporary exchange shutdown.

While Emkay suffered significant losses, some investors profited by buying Nifty stocks at lower prices, according to a Fisdom report.

Can 'fat finger' trade affect market participants too?

Yes.

Fat finger trades can lead to substantial intra-day market swings, resulting in potential losses for regular investors who might find themselves on the wrong side of the trade.

These incidents can contribute to a perception of higher market risk, deterring some investors from participating in the financial markets.

Additionally, the rise of algorithmic traders, who operate with high-speed technology, can amplify the impact of fat finger trades.

This can also harm the reputation of the involved broking houses.

Are broking houses charged for this kind of 'fat finger' trade?

No, currently, there is only disciplinary action that the exchanges may take against brokers who execute fat finger trades.

The action further depends on the scale of trade, the impact on markets and process flaws on the broker’s part, according to Fisdom.

Are there any measure to prevent 'fat finger' trade?

In response to the potentially catastrophic impact of fat finger trades, financial institutions and exchanges have implemented several proactive measures.

Many trading platforms incorporate real-time alert systems that notify traders when their orders deviate significantly from typical market parameters.

These alerts serve as early warning signals, allowing traders to review and confirm their orders before execution.

Another key strategy to prevent fat finger trades is enforcing the use of limit orders instead of market orders.

This approach ensures that orders are executed at a predetermined price or better, reducing the risk of sudden price swings.

Exchanges have even introduced circuit breakers that temporarily halt trading when prices experience extreme fluctuations.

This mechanism provides a cooling-off period during which traders can reassess their positions.

Additionally, brokerage houses and exchanges maintain post-trade surveillance teams to review and investigate unusual or erroneous trades promptly.

This helps in identifying and rectifying 'fat finger' trade incidents.

Do we require more steps to prevent 'fat finger' trades?

Yes, we do.

Rajesh Baheti of Crosseas Capital Services emphasises the importance of preventing artificial limits on option prices.

He suggests that stop loss orders should not be allowed as market orders to prevent liquidity issues caused by their execution.

Tejas Khoday of FYERS, also highlights that there were no system failures in recent incidents, emphasising the need for traders to use stop loss limit orders rather than market orders.

If there are 'fat finger' chances in trading, should I be prevented from trading in stock markets?

No, you just need to be extra cautious about the markets by using the risk-reward equation in every trade or investment you make.

While stock markets are risky, they can give equal opportunities to earn good returns, as per Fisdom.