What Is a Fat Finger Error?
A fat finger error is a human error caused by pressing the wrong key when using a computer to input data. Fat finger errors are often harmless but can sometimes have a significant market impact. For example, if a trader receives an order to sell 1,000 shares of Apple Inc. at the market price and incorrectly enters 1 million shares to sell at market, the sell order has the potential to transact with every buy order at the bid price until it gets filled.
- A fat finger error is an error caused by a human, as opposed to a computer, in which the wrong information is inputted.
- The error is often harmless, but can sometimes have huge implications, depending on how widespread its impact is and how long it takes to catch.
- Most errors in trading, either human or machine, can be contained if caught in time and canceled.
Understanding Fat Finger Error
In practice, most brokerage firms, investment banks, and hedge funds set up filters in their trading platforms that alert traders to inputs outside typical market parameters or to prevent erroneous orders from getting placed. Most U.S. exchanges, such as the New York Stock Exchange (NYSE), NASDAQ and the American Stock Exchange (AMEX), require erroneous trades to be reported within 30 minutes of execution.
In the aftermath of the May 6, 2010, “flash crash” that caused a significant, rapid and unexpected drop in U.S. stock indexes, one early explanation was a fat finger error. The idea was that a trader had entered an order incorrectly, placing the order in the billions rather than the millions. However, after further investigation, the Federal Bureau of Investigation (FBI) and Commodity Futures Trading Commission (CFTC) determined that the flash crash was in fact caused by false sell orders being placed by a high-frequency trading algorithm.
Ways to prevent fat-finger errors include firms setting limits on the dollar or volume amount of orders, requiring certain authorizations for trades over a certain dollar value, and using algorithms and other computerized processes to enter trades, versus having traders enter them manually.
Examples of Fat Finger Trading Errors
- A fat finger error was blamed for causing a 6% plunge in the British pound in 2016.
- A junior Deutsche Bank employee mistakenly sent $6 billion to a hedge fund in 2015 after incorrectly entering the “gross figure” instead of net value. Deutsche Bank retrieved the funds the following day.
- In 2014, a trader at Mizuho Securities accidentally placed orders for more than $600 billion in leading Japanese stocks; the price and data volume were entered in the same column. Fortunately, the majority of orders were not executed before they were canceled.
Preventing Fat Finger Errors
The following processes and procedures may reduce fat finger errors:
- Set Limits: Firms can minimize fat-finger trading errors by setting up filters on their trading platforms. A filter could be established to prevent a trade from getting placed if it's above a specific dollar or volume amount. For example, if an order is over $2 million or 500,000 shares.
- Authorization: Requiring authorization for trades that are over a specified amount can reduce fat finger errors. For instance, a securities firm might require that the head trader has to authorize and release trades that exceed $500,000.
- Automation: Using trading algorithms and straight-through processing to enter orders minimizes the risk of fat-finger errors. Manually placing a large number of orders over a trading day can be tedious, which increases the likelihood of mistakes. Orders that feed directly into the firm’s trading system reduce the risk of human error.