‘Fat finger’ trades which are erroneous trades executed due to the trader or dealer pressing a wrong key, occur quite frequently on domestic as well as overseas exchanges. While they do not attract much attention if the sum involved is small, there are times when the loss incurred is very large. It is therefore necessary that rules are framed to prevent such trades as well as to have a redressal mechanism for those losing money through such trades. Fat finger trade on the NSE last week resulted in a broker, Vardhaman Global, making a loss of ₹250 crore. The error occurred when an FPI client, Kuber India Fund, tried to square its position in a Nifty call option. Instead of selling the options at the market price of ₹2,130, around 10 lakh call options were sold for ₹330 instead, leading to a large loss to the client. The contracts could be sold much below the market price because there are no fixed price bands in derivative contracts, which allows prices to fall or rise rapidly and very steeply in the futures and options segment.

Risks of such trades in the derivatives segment persist and it is up to the trading members, stock exchanges and the regulator to sit together and devise checks at every level to minimise loss to the investors. In 2012, a trader at Emkay Global, while executing an order on behalf of Templeton Mutual Fund, mixed up the volume and price columns, resulting in a loss of ₹51 crore for the brokerage. Even if the mistake is by one investor, all the counter-parties in the trade stand to lose money. Traders and investors holding the contract in which the error occurs, also tend to incur losses if they have open market orders, or order to execute trades at market price. It is best to ensure that such errors do not occur in the first place, and that can be achieved only by putting adequate checks at the intermediary level. Exchanges can make it mandatory for brokers to implement two-step validation, especially for orders which are bigger than a specified size, for instance, orders above ₹5 crore in value. A pop-up alert that says — “will cause huge disruption” or “Not enough quantity in traders account” can be a wake-up call to traders or dealers while executing the order. Brokerages too should assign voluminous deals to experienced senior staff. Intermediaries failing to implement adequate checks should be penalised by the exchanges.

It is easy for the trading members to ask for annulment or cancellation of these trades, but such cancellations are not only tricky for exchanges, they also erode the credibility of market infrastructure institutions. SEBI did well to ask exchanges to put out a set of procedures and protocols to cancel erroneous transactions, following the Emkay Global issue. Trading members can request for annulment only if they had taken adequate precautions and implemented all the risk management measures as provided by the exchange. There are also penal charges for requesting a cancellation. Clearly, further precautions and preventive steps are called for now.

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