What is a ‘Fat finger Trade’?

Recently, the National Stock Exchange of India witnessed a freak trade in weekly Nifty 50 options contact. It led to a loss of around Rs 200 crore for traders. Such freak trades are called as Fat finger Trade.

Background

  • Recent freak trade is not just a one instance. India have witnessed such instances in past as well.
  • One such freak trade at the National Stock Exchange had catapulted Chitra Ramakrishna in April 2013.
  • On October 5, 2012, fat finger trade had triggered a huge flash crash, leading to loss of Rs 10 trillion of investors’ wealth at NSE.
  • NSECEO Ravi Narain had to pay the price, while baton was passed to Ramakrishna.

What is a fat-finger trade?

A fat-finger trade is a human error, when an order is punched. Such error can include entering a wrong value with respect to price or quantity or selection of wrong execution action like buy or sell. When the freak trade is executed, the price hits an abnormal level for some second but later returns to the level where it should actually be. For instance, in the recent freak trade, trader executed a sell order at Rs 0.15, in Nifty 14,500 call option.

Impact of Fat-finger trade

Freak trades or fat-finger trade not only result in a loss to trader punching the order. But it also results in loss for others who may have placed a Stop Loss order to their open positions, because Stop Losses may have got triggered due to abnormal price movement.

How Fat-finger trade can be avoided?

The fat-finger trades can be avoided if they are caught in time. Exchanges and brokerages have been making constant efforts to avoid such trades by placing some preventive measures. They are set filters to give alert to traders while placing orders outside the parameters of market. Furthermore, price movements are also capped by placing circuit filters and cooling off period.

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