Fat finger trades. What comes to mind when you see these three words? If you’re thinking about a physical error, like when you accidentally hit the wrong key on your keyboard, then you’re not far off. A fat-finger trade is just that: a trade made by mistake, usually because of a typo or some other error.
In this article, we will discuss what fat finger trades are, where the term came from, and some famous examples of these errors.
What is a fat-finger trade?
A fat-finger trade, also known as a fat finger error, is an unintentional trade that is executed due to a mistake made with the input of orders. For example, if a trader entered the wrong stock ticker or quantity, they may have made a fat finger trade.
These trades can also be made by algorithms, which are programmed to automatically place trades based on certain conditions. If there is a mistake in the code, an algorithm can make a fat finger trade as well.
However, a fat finger typically refers to a manual trade that is made by a human trader. That's because humans are more likely to make errors when entering trade orders by hand.
The high-speed trading scenario, anxiety, and adrenaline rush that come with day trading can also lead to more mistakes.
Where does the term fat-finger come from?
The term "fat finger" comes from the idea that these mistakes are often due to fingers being too large to hit all the buttons on a keyboard or screen accurately. Fat finger trades can have a significant impact on financial markets and often result in losses for traders.
Imagine how difficult it would be to type on a keyboard if your fingers were twice as big! Fat finger errors are similar in that they can cause big problems, even though they might seem small at first.
Famous fat finger trades
There have been many famous fat finger trades throughout history. Here are a few examples:
In 2016, a 6% plunge in the British pound occurred. A large drop in currency can often be attributed to political uncertainty, and in this case, the UK voted to leave the European Union.
Computer trading was also blamed for the sharp fall. However, a fat finger error was also a part of the story.
Another true story was when a trader at a Japanese bank (Mizuho Securities) entered both the trade size and the desired price in the same section in 2014. This caused them to buy much more stock than they had intended.
The bank did manage to cancel many of the orders, but it goes to show that even the most experienced traders can make mistakes. This cost the bank to lose 27 billion yen. That's about $247 million!
In 2009, a Swiss financial institution named UBS bought 3 trillion bonds from a video game firm (Capcom) by mistake. UBS is one of the world’s largest banks, so this was a pretty big deal. Fat fingers were to blame.
Only 6 years later in 2015, a junior Deutsche Bank employee accidentally sent $6 billion to a hedge fund after mistaking gross and net figures. This accident was not as severe and the bank was able to regain the funds from the hedge fund the next day. If they weren't able to though, it would have been one of the most costly fat finger trades in history.
These are just a few examples of famous fat finger trades. As you can see, even professional traders can make mistakes. It's important to be careful when entering orders and to double-check or even triple-check your work.
What was the biggest fat finger error?
$617 billion was the biggest fat finger error in history. This occurred when an unknown trader placed 40 different orders of various shares of Japanese companies. This was done on the OTC (over-the-counter) market.
The trader must have had some really fat fingers to make so many mistakes in such a short period of time! While this article has been mostly about fat finger trades in the financial markets, it's important to note that these errors can happen in other industries as well.
For example, typos can happen all the time in the stock journalism industry. If a writer accidentally types "Tesla" instead of "Tesco," it could cause a big problem. Financial reports from investor relations can also contain fat finger errors.
An incorrect earnings report can ruin a company's stock price. This type of accident can be embarrassing but also very costly. Fat finger errors are more common than you might think.
They can have a big impact, so it's important to be careful when entering orders, reading research or when writing reports. There will be proofreading systems in place but sometimes even that's not enough. Accidents happen. Fat fingers happen. Just be careful out there!
How to prevent fat finger trades
There are a few things you can do to prevent fat finger trades. First, make sure you have a clear understanding of what you're trying to trade. Know exactly what the ticker symbol is and what you're trying to buy or sell.
Second, use limit orders instead of market orders. This gives you more control over your trade and ensures that you won't accidentally buy or sell at the wrong price.
It also gives you time to cancel the trade if you realized you made a mistake. You can also place your orders when the market is closed. The trade will not execute until the market opens, so you'll have time to cancel it if you need to.
This also allows you to make sure you're entering the correct information. Using a trading platform that has built-in safeguards against fat finger errors can also help prevent these mistakes.
Some platforms will require you to enter a trade size multiple times or will have a confirm button that you need to click before the trade is executed. Lastly, make sure you double-check and take your time with your trades.
Rushing can lead to mistakes, so it's important to be patient and take your time. Fat finger trades can happen to anyone. Once it's submitted, you can't cancel it, so you want to be sure that you're getting the price you want and not making any other mistakes.
While fat finger errors are not the most common type of trading error, they can still have a significant impact on your bottom line. If you are not careful, these errors can cost you a lot of money.
You might think a fat finger trade is silly and not likely. However, even if there is just a 0.5% chance of it happening, based on probability it will occur at least once after 200 trades are made.
If you are a frequent trader, it may just happen sooner than you think or it might have already happened to you before. The best way to avoid fat-finger errors is to be aware of them and to trade with caution.
Make sure that you use risk management strategies and always double-check your orders before you place them. By following these simple steps, you can help ensure that your trading career is not derailed by a simple mistake.