Anyone who’s been interested in trading for long enough will have hear the term ‘fat finger’ trading, but what does it actually mean? And what are the most famous examples of fat finger trading mistakes?
‘Fat finger’ trading is a term used in the financial industry to describe a situation where a trader accidentally enters the wrong trade, order, or trade size, due to a typing error or other unforced mistake.
This can result in unintended consequences, such as large losses, or missing out on a profitable trade. The term ‘fat finger’ refers to the idea that the trader’s fingers were too big or clumsy to accurately input the intended order or trade. Fat finger trading can occur in any market, but is most commonly associated with electronic trading platforms where trades can be executed quickly and with minimal human intervention.
Are there any real-world examples of fat finger trading mistakes?
There have been several high-profile examples of fat finger trading mistakes in the financial industry.
One of the most famous incidents occurred in 2012, when a JPMorgan Chase trader known as the ‘London Whale’ made a series of bad trades that resulted in a loss of over $6 billion for the bank. The trader made the trades using a complicated spreadsheet that contained a number of errors, including an incorrect assumption about market volatility.
Another example occurred in 2014, when a trader at the Japanese brokerage firm Mizuho Securities accidentally placed an order to sell 610,000 shares of a stock at 1 yen each, instead of 1 share at 610,000 yen. The mistake resulted in a loss of over $225 million for the company.
In 2018, a trader at the South Korean brokerage firm Samsung Securities mistakenly issued 2.8 billion shares to employees as part of a dividend payment, instead of the intended amount of 2.8 million shares. The mistake resulted in a loss of over $100 billion for the company.
These incidents demonstrate the potential negative consequences of fat finger trading mistakes, and highlight the importance of proper risk management and controls in the financial industry.
How can traders avoid fat finger trading errors?
Traders can take several steps to avoid fat finger trading errors, for example they could:
Invest in training and education. Traders can improve their skills and knowledge by attending training sessions, reading industry publications, and seeking advice from experienced professionals.
Use automated trading systems: Automated trading systems can help reduce the risk of human error by executing trades based on a set of pre-determined rules or algorithms.
Double-check all trades and orders before executing them: This can help catch any typing errors or other mistakes before they result in unintended consequences.
Implement risk management and control measures. These might include setting limits on the size of trades, setting stop-loss orders to control losses, and regularly reviewing trading activity to identify and address any potential issues.
Take breaks and avoid distractions. Traders who are tired or distracted are more likely to make mistakes, so taking regular breaks and avoiding distractions can help reduce the risk of fat finger trading errors.
How do banks and hedge funds avoid fat finger trades?
As well as the general steps described above, banks and hedge funds use a variety of additional measures to avoid fat finger trades which include:
Technology tools. Banks and hedge funds use a variety of technology tools to help prevent fat finger trades. These include software that detects unusual trading patterns or alerts traders to potential errors.
Compliance and regulatory oversight. Banks and hedge funds are subject to strict compliance and regulatory oversight, which helps ensure that they are following best practices and taking steps to prevent fat finger trades. These measures can include regular reporting, periodic audits, and hefty penalties for non-compliance.
