What 'Unwind' Means

To unwind is to close out a trading position, with the term tending to be used when the trade is complex or large. Unwinding also refers to the correction of a trading error, since correcting a trading error may be complex or require multiple steps or trades. 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 first buying the sold shares and then purchasing the shares that should have been purchased in the first place.

Breaking Down 'Unwind'

Unwinding is used to refer to the closing trades that require multiple steps, trades, or time. If an investor takes a long position in stocks while at the same time selling puts on the same issue, they will need to unwind those trades at some point. 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 or closing a trade by participating in an offsetting transaction.

Closing a Position

Closing a position is the process required to eliminate a particular investment from a portfolio. In the case of securities, when an investor wants to close the position, the most common action is to sell the security. In the case of shorts, an investor would need to buy the short shares back to close the position. The term unwinding is more likely to be used when the buying or selling occurs over multiple transactions, and not just one. Unwinding is a process.

Unwinding to Correct Trade Errors

If 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. They must then make the original sale requested. If the broker experiences a loss during this error correction process, 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 that are 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. Error Of Principle

    An error of principle is an accounting mistake in which an entry ...
  2. Accounting Error

    An accounting error is an error in an accounting entry that was ...
  3. Tracking Error

    Tracking error tells the difference between the performance of ...
  4. Correction Notice

    Correction notices announce that a process or application contains ...
  5. Business Broker

    A business broker is a company that assists in the purchase and ...
  6. Error Term

    An error term is a variable in a statistical model, which is ...
Related Articles
  1. 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.
  2. Investing

    Jamie Dimon: Fed QE Strategy May Cause a Market Panic

    JPMorgan's CEO warns that unwinding the Fed's massive balance sheet may backfire.
  3. Investing

    Picking your first broker

    If you're a rookie investor, choosing a broker may be your first big investment decision. Learn more on whether you should you go with a full-service broker or a discount broker.
  4. Personal Finance

    Research Report Red Flags For Brokers

    Discover how to look past analysts' ratings to find winning stocks for your clients.
  5. Trading

    3 Costly Spelling Errors

    History has proved that some spelling errors can cost companies and governments millions of dollars.
  6. Trading

    Price Shading In The Forex Markets

    This practice puts brokers ahead of their clients, but it doesn't have to be a negative for traders.
  7. Investing

    The 4 Ways To Buy And Sell Securities

    Know the four main avenues of buying and selling investment instruments.
  8. Investing

    ETF Tracking Errors: Protect Your Returns

    Tracking errors tend to be small, but they can still adversely affect your returns. Learn how to protect against them.
  9. Investing

    5 Misconceptions About Discount Brokers

    While discount brokers are the perfect choice for some investors, their business model could be detrimental to others.
  10. Investing

    Investors: You Are Responsible For Your Investments

    Should you leave it all up to your broker or take the reins yourself? Striking a happy medium will provide the best returns.
RELATED FAQS
  1. If everyone is selling in a bear market, does your broker have to buy your shares ...

    Learn about who the counterparty to your trades is, and how your broker functions during a market sell off. Read Answer >>
  2. Can a Broker Sell Your Stocks Without Permission?

    In this article, find out if and when it's legal for a broker to sell securities from a customer's account and portfolio ... Read Answer >>
Trading Center