What does 'Unwind' mean

To unwind is to close out a position that has offsetting investments or the correction of an error. Unwinds occur when, for example, a broker mistakenly sells part of a position when an investor wanted to add to it. The broker would have to unwind the transaction by selling the erroneously purchased stock and buying the proper stock. Generally, the term "unwind" refers to more complicated and layered trades.

BREAKING DOWN 'Unwind'

One type of investing that features unwind trading is arbitrage investing. If an investor takes a long position in stocks while at the same time selling puts on the same issue, he will need to unwind those trades at some point. Of course, this entails covering the options and selling the underlying stock. A similar process would be followed by a broker attempting to correct a buying/selling error.

Unwinding is a process of reversing a particular transaction by participating in an offsetting transaction. This process can be used to close a particular position or to correct a trade error.

Closing a Position

Closing a position is the process required to eliminate a particular investment vehicle from a particular portfolio. In the case of securities, when an investor looks to close out the position, the most common action is to sell the security. In the case of shorts, an investor would need to buy out the associated debt, possibly through the acquisition of shares.

Unwinding to Correct Trade Errors

In cases where a broker accidentally performs an incorrect action with an investor's funds, such as buying more of a particular security when the instruction was to sell it, the broker must resell the security that was accidentally purchased to correct the error. If the broker experiences a loss when the erroneous purchase is resold, the broker is responsible for the difference, not the investor.

Other activities that can be considered a trade error include buying or selling a security other than the one specified, buying or selling the incorrect quantity of a security, or trading in prohibited securities. Errors that are caught prior to being fully processed, and successfully canceled, do not require unwinding.

Unwinding and Liquidity Risk

Liquidity risk can have negative effects on an investor's or a broker's ability to unwind a transaction. Liquidity refers to the ease at which a particular asset can be bought or sold. If an asset is less liquid, it is more challenging to find an appropriate buyer or seller, so the liquidity risk is elevated. Regardless of whether a transaction was completed intentionally or accidentally, all risks associated with the particular security still apply when attempting to unwind it.

RELATED TERMS
  1. Cancellation

    Notice by a broker informing his or her client that an erroneous ...
  2. Each Way

    A slang phrase used when a broker earns commissions from both ...
  3. Give Up

    A procedure in securities or commodities trading where the executing ...
  4. Aged Fail

    A contract between two broker-dealers that has not been settled ...
  5. Business Broker

    A professional who specializes in the purchase and sale of companies. ...
  6. Two Dollar Broker

    A floor broker who executes orders for other brokers who cannot ...
Related Articles
  1. Trading

    Broker Or Trader: Which Career Is Right For You?

    A day in the life of a broker or trader is an exciting and varied one. Find out how to decide between these two financial professions.
  2. Investing

    Picking Your First Broker

    If you're a rookie investor, your first big investment decision should be an informed one.
  3. Investing

    How To Choose The Right Online Trading Broker

    The online broker market is becoming more competitive, but differences exist in services that can help traders choose the broker that’s right for them.
  4. Trading

    Is Your Forex Broker A Scam?

    While the forex market is slowly becoming more regulated, there are many unscrupulous brokers who should not be in business.
  5. Financial Advisor

    Is Your Broker Acting In Your Best Interest?

    Learn the clues you'll need to determine whether you've chosen a reputable professional.
  6. Investing

    What Does a Broker Do?

    In the investment world, broker is a term used to refer to an individual or entity that helps facilitate trading in financial securities.
  7. Personal Finance

    Research Report Red Flags For Brokers

    Discover how to look past analysts' ratings to find winning stocks for your clients.
  8. Investing

    What Are Transaction Costs?

    Transaction costs are expenses incurred from buying or selling securities.
  9. Managing Wealth

    Broker Or Trader: Which Career Is Right For You?

    Both brokers and traders buy and sell securities, but there are some subtle differences between the two careers.
  10. Trading

    How Forex Brokers Make Money

    Forex brokers set their prices based on commission, spread, or a combination of both. Traders have to be cautious in the thinly regulated forex market.
RELATED FAQS
  1. Does a broker always have to buy a stock if I want to sell it?

    There are certain times when a broker must purchase the stock that you are selling. For example, if the broker is a market ... Read Answer >>
  2. My broker just sold securities out of my account without my permission. Is this legal?

    Your broker's actions are not legal unless he or she sold the securities under certain conditions. Let's look at the two ... Read Answer >>
  3. What is the difference between a broker and a market maker?

    A broker is an intermediary who has a license to buy and sell securities on a client's behalf. Stockbrokers coordinate contracts ... Read Answer >>
  4. I'm new to this. Can I sell or buy stock by myself?

    In order to buy stocks, you need the assistance of a stock broker since you cannot just phone up a company and ask to buy ... Read Answer >>
Hot Definitions
  1. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  2. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  3. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
  4. Job Market

    A market in which employers search for employees and employees search for jobs. The job market is not a physical place as ...
  5. Yuppie

    Yuppie is a slang term denoting the market segment of young urban professionals. A yuppie is often characterized by youth, ...
  6. SEC Form 13F

    A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...
Trading Center