Fat Finger Trade – What is it? What are the Worst Errors?

A fat finger trade is a case of entering or exiting a trade by mistake. You can consider it synonymous with pushing the enter button instead of the delete button on your keyboard. The impact of a fat finger error may not be dire if you are a retail trader. However, the impact can be catastrophic if the trade was huge. In fact, such an error can trigger a chain reaction that hits you very hard.

So, what exactly is this fat finger trade, and what are the worst errors? If you want to know the answer to these questions, you are on the right platform. We are going to explain all you need to know about fat finger errors. Let’s dive deep to learn. 

What is a fat finger trade? 

Alexander Pope gave us a proverb in his Essay on Criticism “to err is human”. The proverb means that making mistakes is a quite natural human phenomenon. Similarly, traders and investors are also human beings. They also make mistakes and whenever they hit a sell button instead of the buy button or vice versa, they make a fat finger trade. It is actually an error, not a trade.

Explanation

As we have mentioned before, consider pressing the enter button instead of the delete button or vice versa. Or consider typing errors while texting? Most of all make such mistakes and it is normal because to err is human. However, this small error can cause a huge impact, especially if it is done by big traders or dealers. So, we can say that fat finger trade occurs if traders make this small mistake that results in initiating a large buy or sell order.

What are the worst fat finger trade errors? 

The impact of a fat finger trade depends on how large the transaction that an error initiates. The impact is usually massive when larger orders are placed by mistake. In fact, a fat finger trade may cause investors huge losses. Here are examples of two fat finger trades that caused huge losses. You can understand how this small error can affect the entire system through the following examples.

1. In 2006, a Mizuho Securities trader mistakenly placed orders of $600 million for a major company in Japan. He placed the price and data volume in the same column. This fat finger mistake could do massive damage. However, the broker was able to cancel most orders before they were filled.
2. In 2012, an Emkay Global Services trader placed a wrong sell order for Nifty stocks of INR 600 crores. He mistakenly considered volume to be a price column and initiated a fat finger trade. As a result of this error, Nifty’s stock plummeted by 15% within no time. Hundreds of traders made huge gains at the expense of Emkay who lost nearly INR 50 crores.
3. In 2012, another incident of fat finger trade occurred. A small mistake caused a crash at the National Stock Exchange and wiped INR 10 trillion of investors. 
4. In 2016, a fat finger mistake caused a 6% dip in the British pound and caused a massive impact. 
5. In 2018, a Deutsche Bank employee sent $6 billion to a hedge fund account by mistake. He entered gross figures while he had to enter the net amount. 

How to prevent fat finger errors?

As it is evident from the examples quoted above, fat finger errors can cause a huge impact. They lead to huge losses for investors. Therefore, it is imperative to find ways to prevent fat finger trades.

1. Automation is the most effective method to prevent fat finger errors. In this era of advanced technology, it isn’t a big deal either. Trading algorithms can easily prevent such errors. It is quite obvious that placing manual orders throughout the day is fatiguing and increases the chances of fat finger errors. Therefore, automation is the most effective method. 
2. Brokers can also set up filters on their trading platforms to prevent fat finger errors. For example, they can set filters to stop an order placement exceeding set parameters. 
3. Finally, authorization can also help in preventing fat finger errors. Just like filters, an order must be authorized if it exceeds a certain limit.

The wrap-up

Fat finger trade refers to a trade that traders initiate by mistake. It is very similar to making typing mistakes. For example, if a trader confused a price column with volume and initiated a trade, it would be a fat finger error. A trader may also mistakenly o place a sell order instead of a buy order or vice versa. Furthermore, fat finger errors may lead to a massive impact on the market. There are numerous examples that show the impact of such errors. Therefore, it is important to take measures to prevent fat finger errors. Automation, authorization, and setting up filters are the best measures to prevent such costly errors.