Erroneous Trade

DEFINITION of 'Erroneous Trade'

A stock transaction that deviates so much from the current market price that it is considered wrong. Erroneous trades are caused by a variety of factors including computer malfunctions or human error. These trades are halted, or broken, because they do reflect the true price of the security and they can influence or cause erroneous trades on other stocks or exchanges.

BREAKING DOWN 'Erroneous Trade'

In 2009, the Securities and Exchange Commission (SEC) approved new exchange rules that would stop erroneous trades from being executed. The SEC rules allow an exchange to break a trade if the price differs from the consolidated last sale price by more than a specified percentage amount. For example, in regular market hours, 10% for stocks priced under $25; 5% for stocks priced between $25 and $50; and 3% for stocks priced over $50. Furthermore, the review process for the erroneous trade must begin within 30 minutes of the trade, and be resolved within 30 minutes after that.

In 2010, an erroneous trade was blamed for the nearly 1,000 point drop in the Dow Jones Industrial Average. The mistake was rumored to involve E-mini contracts which are stock market index futures contracts that trade in Chicago.