What Is Don't Know (DK)?
"Don't know (DK)" is a slang expression for an out trade that is used when there is a discrepancy in the details of a trade. Also known as a "DK'd trade," the expression refers to a situation where at least one of the parties involved claims to lack knowledge of some aspect of the trade or "does not know" the trade.
The purpose of an exchange—such as the New York Stock Exchange (NYSE), Nasdaq, and the London Stock Exchange (LSE)—is to ensure an organized and efficient marketplace where buyers and sellers can trade financial instruments such as stocks, commodities, and derivatives. When an exchange receives a DK'd trade, it cannot execute the trade because of contradictory information associated with the trade. The exchange's clearing house will not be able to settle a DK'd trade because the terms of the trade are conflicting or inconsistent.
- "Don't know" is a trading expression used to describe a trade that cannot be executed because there is a discrepancy in the details of the trade.
- A "don't know" trade happens when one of the parties disputes or rejects the trade due to any number of reasons, such as an inconsistency in the price or number of shares.
- This tactic is sometimes used as a dishonest move to get out of a trade when the market goes against the trader.
- The Securities and Exchange Commission (SEC) outlines rules of procedure when a trade is DK'd.
Understanding Don't Know (DK)
When a trader places an order to buy or sell a security, the settlement or completion of the trade does not occur automatically. A clearing house acts as an intermediary that reconciles the order between the transacting parties, transferring the securities to the buyer and the cash to the seller. This process can take several days or longer to complete after the original placement of the trade. In some cases, the trade may fail to clear entirely.
A DK'd trade can result when one of the parties to a trade has a dispute or rejects a trade for any number of reasons. They may not have the trade in their records or there may be a discrepancy with the price, number of shares, or CUSIP number. Sometimes it may be due to misdirected instructions from one party to the other. Occasionally, a party may use this tactic to get out of a trade when the market moves against them, which has been noted as an unscrupulous tactic in the financial sector.
The SEC Rules for DK'd Trades
The Securities and Exchange Commission (SEC) provides certain rules and procedures for DK'd trades done on the Nasdaq stock market in its Uniform Practice Code. The rules specify that any contract that has been DK'd by an opposing party or that has been deemed DK'd under the rules of service may be closed out by the party that submitted the contract without any notice during normal trading hours.
The rules go on to state each party must submit a Uniform Comparison or Confirmation within a business day and these comparisons or confirmations will be compared to determine if any discrepancy indeed does exist regarding the DK'd trade. If only the claiming party submits a comparison or confirmation, the other party can be notified and has four business days to respond. If they do not, then the claiming party has no further liability on the DK'd trade.
A confirmation or comparison must include specific information outlined by the SEC. This includes a description of the security, the price at which the transaction was made, and any other specific phrases that help determine the details of the trade.
If traders are trading through an electronic trading platform, oftentimes they will be notified via the platform's specific code that a trade has been DK'd.
Example of Don't Know (DK)
There are many ways a trade can be noted as DK'd. For example, firm XYZ buys 1,500 shares of ABC stock from firm X. When firm X delivers the stock to firm XYZ, firm XYZ might reject the trade (DK it) if the terms of the delivery (price, quantity, or specific security) don't match their records, or if the trade is not on their records at all.