SLATE. All you wanted to know about: Fat finger trades

These days, when stock market behaves in an erratic fashion, it may not just be due to foreign investors selling or geo-political tensions in a far-off land. It may also be due to a ‘fat finger’ trade. After the market meltdown last Tuesday, a 5 per cent intra-day swing in Nifty futures had traders warning darkly of the ‘fat finger’ at work, though this was refuted by the exchange.

Do you make typos while messaging your friends on WhatsApp? Well, traders and dealers in the securities markets make typos too when they punch in large buy or sell orders into their terminals. Erroneous trades caused by such typos, which set off a chain reaction of related transactions, are known as ‘fat finger’ trades.

India’s most famous ‘fat finger’ incident occurred in October 2012, when a trader at the Emkay Global Services (a stock broking firm) mixed up the volume and price columns on a trade and punched in an erroneous sell order for ₹650 crore worth of Nifty stocks. Within minutes, the order sparked a 15 per cent drop in the Nifty, triggering the circuit breaker and temporarily shutting down the exchange. But not before Emkay lost over ₹50 crore on the trade and hundreds of other investors made merry, lapping up Nifty stocks at rock-bottom prices. Though Emkay pleaded hard for the trades to be annulled, the NSE didn’t oblige.

Recently on October 1, 2014, a particularly fat-fingered trade on the Tokyo Stock Exchange saw a dealer placing a $622 billion order to buy bluechip stocks like Toyota (he entered the price and volume data into the same box) sending global markets into a tizzy.

Every reported instance of a fat finger trade has caused a record intra-day swing in the affected index, causing fluctuations in investor wealth to the tune of billions of dollars.

Erroneous trades may not have caused much havoc in the olden days of ring trading when each share transaction took hours or even a day to put through. But on today’s electronic exchanges, an erroneous order can snowball within seconds, drawing in thousands of investors as counter-parties and forcing them to buy or sell securities at off-kilter prices.

The rising clout of algorithmic traders, who use computer programmes to spot split-second opportunities and flood the system with millions of orders within micro-seconds, exaggerates the impact of fat fingers. Undoing the damage from fat finger trades is far from easy. And too many butter-fingered trades could undermine the ordinary investor’s faith in the system.

Given that fat finger trades usually have a market-wide impact, if you’re a regular investor, you could be caught on the wrong side of one. If you are, you could lose a packet, assuming the exchange does not annul it.

Fat finger trades add one more element of risk and uncertainty to investing that we could do without. Most people shy away from the financial markets because of their inexplicable intra-day swings due to the global information overload. Fat finger episodes, which deliver nasty jolts to the market without any change in the underlying fundamentals, only strengthen the perception that investing is akin to playing Russian roulette.

To err is human and market players need to devise ways to throw out wildly implausible orders. But meanwhile, if you’re all thumbs, don’t be a securities dealer. It could cost billions.

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