The so-called fat finger trades are a real problem in daily stock market business. Because they can throw the entire financial market out of balance within seconds.
• Fat finger trades are errors when entering an order
• Most of the time it involves transposed numbers or unintentional mix-ups
• Errors not very common, but sometimes spectacular
A fat finger trade or fat finger error refers to errors when entering an order in stock market trading. Such an error, which is caused by a figuratively “big finger,” can potentially lead to significant upheavals on the capital market. Because, as many financial institutions and stock traders have discovered over the years, an extra zero here or there, as well as the difference between millions and billions, can make a very big difference.
How do fat finger trades arise?
In the most common cases, fat finger trades involved classic number twists or unintentional confusion between order volume, number of units and security identification number. In this context, the work intensity and level of concentration of the brokers and stock exchange traders as well as the lack of control over the release of individual orders also play an important role. Because a fat finger error is usually a result of human error.
How often does this phenomenon occur?
Considering that there are hundreds of markets around the world where trillions of transactions are processed at breakneck speeds every day, the frequency of fat finger trades is relatively low. For this reason, it is even more embarrassing for the broker if he makes such a typo.
Are fat finger trades always legally binding?
In April 2018, the Bloomberg news agency reported that Deutsche Bank accidentally transferred 28 billion euros to an external account at Deutsche Börse’s Eurex clearinghouse as part of its daily derivatives business. However, after the mistake became known, the money was immediately transferred back. This example clearly shows that certain typos in the financial sector are not always immediately legally binding. However, in order to guarantee legal certainty, many stock exchanges have special so-called mistrade rules. These guidelines prescribe deadlines and conditions that regulate compensation for damages in the event of a failed stock exchange transaction.
The “biggest fingers” of all time
The list of fat finger trades worldwide is endless. Nevertheless, it is worth taking a closer look at the biggest and most spectacular mishaps, as almost no financial institution in the world is spared from them.
Flash crash due to Citigroup error
At the beginning of May 2022, a sudden price loss caused horror on the European stock exchanges. The shock wave spread across the entire European continent in a few seconds and within a few minutes many European indices plummeted by several percent. As the Swiss “Handelszeitung” reported, in absolute terms, assets worth 300 billion euros were destroyed within a few minutes. There was initially a lot of guesswork among stock market traders, as no economic report, company figures, political decisions or anything similar could explain the unusual price movements – especially since the price loss was offset again after a few minutes.
Then it turned out that this was also a fat finger trade: A trader in Citigroup’s London trading department made a “mistake when entering a transaction,” as the major US bank announced. “Within minutes, we identified and corrected the error,” Citigroup told CNBC. However, what exactly the error was was not explained.
This wasn’t Citigroup’s first major mistake. Just two years earlier, in 2020, a trader at the bank mistakenly transferred $900 million to the bondholders of US cosmetics company Revlon, resulting in several costly and lengthy legal proceedings to recover the funds. At that time, Citigroup was fined $400 million for deficiencies in its risk and control system.
Billions instead of millions
In February 2007, a Morgan Stanley trader made one of the biggest faux pas in the company’s history. When the broker placed an order for 100,000 securities, he overlooked the default order multiplier of 1,000. Instead of the desired order volume of $10.8 million, the trader ordered shares worth $10.8 billion. However, the typo was only noticed after more than $870 million worth of shares had already been accounted for. The bank also had to pay a fine of $300,000 to the New York Stock Exchange for its broker’s mistake.
Pounds instead of euros
A mistrade at Ryanair makes it clear that not only brokers on the stock exchange can have “big fingers”. When a market maker confused pounds sterling with euros in October 2002, the airline’s shares traded in London shot up 61 percent.
16 yen instead of 16 shares
In December 2001, UBS supported the sale of new shares in the Japanese advertising agency Dentsu. However, the broker at the major Swiss bank made a fatal mistake. Instead of selling 16 shares for 610,000 yen each, the trader sold 610,000 Dentsu shares for 16 yen per share.
“Zero-sum game” at Lehman and UBS
A broker from the now insolvent US investment bank Lehman Brothers destroyed more than 44 billion euros in market value within seconds with a fat finger trade. In a sell order, the trader mistyped by two zeros and thus sold a hundred times more shares than actually planned. The investment bank had to pay a fine of over 20,000 euros for this faux pas.
The major Swiss bank UBS also had a problem with too many zeros. A broker at the bank entered too many zeros in his order and traded around ten million Roche shares within a few seconds. At that time, January 1999, there were only around seven million shares in the pharmaceutical company.
Editorial team finanzen.net
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