Fat Finger Trades and Retail Investor By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran

January 14, 2015 | Posted by bobbysrinivasan << back to blog

Stock market is a place where many imponderables happen. One such thing is a ‘fat finger trade’. This is basically a typo error. Traders and brokers very rarely of course, type orders with errors leading to a major buy or sell activity. This could be due to entering volume and price columns interchangeably. The result is a disaster. This is a conversation between a student and his finance professor.

Student: Professor, yesterday I read in the ‘Business line’ about fat finger trades. What exactly is it?

Professor: Funny you ask. Let me narrate an incident which will explain fat finger trade vividly. In October 2012, a trader working for the brokerage house ‘EMKAY Global Services’ entered erroneously the volume in the price column and the price in the volume column. This resulted in a sell order for Rs 650 crore worth of Nifty stocks. When the order was executed it resulted in a drop of 15 percent in the Nifty resulting in triggering the circuit breaker and temporarily shutting down the exchange. Because of this EMKAY lost over 50 crore rupees. Also this resulted in some investors able to pick up Nifty stocks at rock bottom prices.

Student: This is not fair. Did the exchange reverse the trade?

Professor: EMKAY pleaded with the NSE to reverse it but NSE said an emphatic no.

Student: Do such things happen often?

Professor: I am not sure but on Oct 1, 2014 in the Tokya exchange a dealer erroneously placed an order to buy $ 622 billion dollar worth of blue chip stocks like Toyota. This sent the global markets into a fizzy.

Student: What are the consequences of such trades?

Professor: For certain, the investor wealth gets deeply affected. Because of this billions of dollars could sometime be wiped from their account. If the exchange does not annul such trades, the investor must be prepared for such unexpected shocks.

Student: What about the retail investor?

Professor: Poor guys. They haven’t the faintest clue as to what is happening; high intraday volatility, you see them running for shelters by selling their stocks never to come back again. Given that the retail investor has a low probability of making gains in the Indian stock market which is dominated by both the foreign and the domestic institutional investors. This is too much to handle.

Student: Are you saying that it is not a fair game for a retail investor to be engaged in the Indian market?

Professor: I am tempted to say yes. According to the reports that I read nearly 73 percent of all transactions in the Indian markets are done using algorithmic trading. The retail investor does not have the faintest clue as to what it is. We talk about market efficiency but the retail investor is poorly informed about the way the market is functioning.

Student: Thank you Professor. I need to think through this information you have provided before I decide to buy stocks.

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