A broker lost Rs 250 crore because of 'fat-finger' trade. What is it?
If you are prepared to sell 10 items of something and erroneously end up selling 1000 items instead, would you not panic? Now, when you find out that you ended up selling item A at a loss instead of selling item B at a profit, would you not be pulling your hair out? An Indian stock broker lost between Rs 200-250 crore in two minutes, all due credit to ''fat-finger trading'' when he sold the wrong stock option at a really unusual price.
WHAT IS FAT-FINGER TRADING?
A fat finger trade is basically when someone conducts a stock market trade because of pressing the wrong key or because of clicking in the wrong place. For eg: if you end up selling 1,000 shares instead of 10, you buy item A instead of item B, you sell item C instead of D, etc. It's basically a costly mistake.
WHAT HAPPENED?
On June 2, 2022 a tweet broke the news that someone had sold an item called '14,500 Option' instead of a '16,500 Option' that cost Rs 2000 per share for 0.15 paise.
Someone lost over Rs 200 crs in a trade today
— Yatin Mota (@YatinMota) June 2, 2022
Nifty 14500 strike option sold till 0.15 paisa, it was 2000 Rs in the money.
Will NSE annul the trade ? #FATFINGER #NIFTY @CNBC_Awaaz @virendraonNifty pic.twitter.com/tB5KuY61Ju
WHAT DOES THAT MEAN?
If you observe the below picture, you can see multiple trades happening every minute. Take a look at the trades at 2:38 pm and 2:39 pm.
Trade happened post 2;30 pm today @YashJain88 @NSEIndia pic.twitter.com/Y2neDbBCem
— Yatin Mota (@YatinMota) June 2, 2022
Now the value of the option that was erroneously sold was valued at about Rs 2100. As it was sold for 0.15 paise, the seller bore a loss of Rs 1999. But mind you, options are always sold in lots, and in these trades, 1 lot contains 50 shares. Meaning, that the person suffered a loss of about Rs 1 lakh per lot. As per stock brokers' trading charts, 25,000 lots were traded.
NIFTY 14500 CE - 5 min Chart
— Ankit Chaudhary (@entrepreneur987) June 2, 2022
Around 25000 lots were traded b/w 2.35 pm and 2.39 pm
25000*50 = 12.5 lakh shares were sold due to punching error, may be someone shorted 14500 CE instead of 16500 CE
Total loss is estimated to be around 200-250 cr @maheshwariashok @Amit_Gulecha pic.twitter.com/5Fv2teVW04
That means a whopping loss of Rs 250 crore. This is expected to be one of the biggest erroneous losses in Indian option trades.
HOW DOES ONE FIX THESE ERRONEOUS LOSSES?
The stock exchange has set up circuit limits (upper and lower) which basically sets a price limit within which stocks and options trades are executed. These circuit limits help traders to avoid these kinds of massive losses. But if things go wrong, the seller can approach the stock exchange to annul such trades amicably with a warning or sometimes both parties can agree on a midway. Sometimes, traders insure their losses, thus making insurance companies bear the losses.
But it is still yet to be understood how there were no circuit limits for this particular trade and how this got executed.
IS THIS DANGEROUS?
When these kinds of unusual sales occur, markets can be manipulated. Massive sale of an option or a stock makes a normal person wonder- 'Who on earth is this person who SOLD these many shares and WHY?'. This sets a market trend and can immediately trigger stock markets to fall. Though there are system alerts when trades are placed at such a huge discount or premium, and stock markets close for the day if the market falls by more than 10%, there was no system alert when this trade was executed.