A fat finger error is the bane of any stockbroker, portfolio manager or hedge fund manager. For a novice retail trader they are a painful shock. Losing money because you have typed in the wrong number or worse bought the wrong share, is not bad investment judgement but an operational mistake. Find out how to avoid doing so, and see how expensive fat finger errors can be.
A fat finger error is the bane of any stockbroker, portfolio manager or hedge fund manager. For a novice retail trader they are a painful shock. Losing money because you have typed in the wrong number or worse bought the wrong share, is not bad investment judgement but an operational mistake. Find out how to avoid doing so, and see how expensive fat finger errors can be.
Takeaways
What is a fat finger error
Examples of major fat finger trades
How to mitigate and deal with one
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A fat finger trade is a euphemism for making a mistake in the process of buying or selling a security. It is so called because the suggestion is your finger is so fat that it pressed the wrong button by accident. As always with finance, the ruder or more random the expression, the more likely it will take hold!
Over your investment career there will be particular times where you place more trades than normal. This can be for a sector rotation, or because you adding a foreign portfolio investment to your stock portfolio.
It is at times like these, where you handling multiple trade orders over multiple markets and sectors that errors can creep in. The effects can be worse than being scammed out of your money.
There are many fat finger trading errors which you will never hear about. Among the biggest are the following two. In June 2015, a junior banker at Deutsche bank mixed up the gross figure and the net value, sending $6 billion by mistake to a U.S. based hedge fund. His boss has been on holiday at the time.
In 2014 in Japan, a broker placed orders for a value of $617 billion in companies such as Honda, Sony and Toyota as well as many others. Because the orders were placed over the counter, the broker had the (lucky) chance to cancel a majority of the orders when the mistake was realised. It is believed, the broker mistakenly put the total value of the transaction in the trading screen field intended for the number of shares.
Sometimes the error is not even spotted for a while! In 2015, the Investor Armin S. bought certificates for the wrong price from BNP Paribas. This caused a loss in the region of €160m for BNP, yet the error was not even spotted for a whole week, as BNP had failed to book more than 8,000 trades.
As momentum trading took hold after the March 2020 Coranavirus inspired market sell off, many novice traders placed their first trades. And promptly bought the wrong stock.
Trading in Zoom Technologies (ticker symbol: ZOOM) had to be halted as it became apparent that traders were actually wanting to buy Zoom Video Communications (ticker symbol: ZM)!
If you have a process in place, this will stop the likelihood of an error ever happening. You can do this by the following:
It is unlikely you will make a mistake if you follow the above recommendations. Do not try and place multiple trades if you are about to run out of the door or someone is trying to have a conversation with you.
Do not let the error become worse.
If it does all go wrong, i.e. you notice you have bought the wrong share, or placed a trade in the wrong account, then firstly think whether you can live with the mistake. Secondly if you cannot, immediately sell the position.
Do not get caught in the trap of hoping to sell it at a gain. You will end up losing more than just the trading fees and a small amount of your capital.
The downside risk to a fat finger error is not to be underestimated. Giving yourself a margin of safety when you are placing trades by clearing your mind of any distractions is important. Capital preservation is not only about investing with reduced risk but ensuring you do not lose money cheaply.
Above all if you have made an error, deal with it straight away. If you are intent on a career in finance, then immediately inform your (future) boss. This ensures they do not find out from someone else (never good). Also because of their experience, they may have a way of solving or reducing the problem. Above all, do not panic and keep a cool head!
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