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

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.

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.

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.

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.

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.

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.

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.