Fat fingers, 10 000 too many and busting trades

Mistake 19: operational errors

Mistakes are painful when they happen, but years later a collection of mistakes is what is called experience.

Dennis Waitley

With the growth in the use of online trading platforms allowing anyone with a computer and access to the internet to trade without the use of a traditional voice broker, the onus of responsibility for ensuring that all trade details are entered correctly sits squarely on the shoulders of the self-directed trader. Without the ‘checking mechanism’ of this third party, the online trader has to ensure that the correct quantity of shares or contracts is entered, at the correct price, in the chosen market, and that the correct directive to buy or sell is given. This can be further complicated by the use of more complex orders such as ‘market if touched’, ‘stop and reverse’, and orders with more than one ’ leg’. These may include spread trades, or intermarket price action where a specific condition in one market causes an entry or exit signal in another market.

For the computer and tech-savvy trader, these issues may not be as important as they are to those with less skill or confidence in these areas. Nonetheless, mistakes can and do occur and they can happen to all of us regardless of our level of experience and operational skills. Even traditional voice brokers executing trades on behalf of clients can make these mistakes, so it is important to know how to deal with them and what to do in the event of a mistake occurring.

Who fears the executioner?

John Robertson from I-deal Financial Group, a boutique Australian-based broking firm specialising in the use of online trading platforms, acknowledges that the increased number of people now executing orders has led to an increase in the number of overall execution errors.

The use of online trading platforms has increased the amount and frequency of errors. The more operators, the more execution errors. The reduction in training of these operators has also increased the amount of errors. Prior to the widespread use of electronic trading platforms, virtually all orders were executed in the trading pits or on the trading floor by highly trained brokers and operators. These days, anyone with a computer can execute their own orders, some with little or no training.

Self-directed trading has reduced the execution risk for brokers with clients self-placing (filling) orders. Brokers, regulators and exchanges are being diligent through education to try to minimise this problem. Online traders must be aware of the extra responsibilities that they take on when they place live orders. Online platforms are not for everybody!

Errors can range from the simple (clicking on buy instead of sell) to complex errors that are difficult to unwind. Money lost can wipe out the trading account. Errors can exist on any item that needs to be modified for the order to be placed.

Errors such as placing a sell order instead of a buy order are just a mouse click away; it is very difficult for the online platform’s automatic safety net to prevent these errors.

Errors such as wrong prices are probably the most frequent. Fat fingers (typos) such as typing in to ‘Buy 10 000’ lots instead of ‘1000’ lots are easily made. Typing in the incorrect markets code (mnemonic) can lead to an error. Buying BHP in the USA instead of the ASX can occur on global platforms if not properly checked.

Very few errors are exited at a profit as, by definition, to exit immediately you must at minimum cross the spread of the market price; that is, sell the bid.

Not all these orders are filled immediately and many can be cancelled before they are filled in the market. For example, a limit order incorrectly put in below the market price will still be pending and give the operator time to amend before being filled.

Some orders placed too far from the market are recognised as errors by advances in technology which automatically reject the order. If you accidentally place a buy order way over the current market price as a limit order, the order will not go to market. Exchanges can ‘bust’ trades (cancel trades) if they believe they are out of market.

Redefining the role of the broker

The growth of online and self-directed trading has redefined the role of the broker from telephone order taker to a virtual electronic ‘partner’ in their client’s trading business. In this regard brokers have an important role in knowing and understanding the trading platforms they are offering to their clients, and providing education and training in the operation of these platforms. Derivatives traders may need more than one online platform to cover the markets and instruments they are trading. In this circumstance the role of the broker in helping to educate traders in the use of these different platforms is very important.

The emphasis on ‘knowing the platform’ and getting the client to be comfortable using it to participate in the market is now critical. This knowledge helps decrease the risk of errors.

With the markets changing from the old open outcry pit-style trading to virtually 100 per cent electronic, brokers have had to adapt or perish. To properly service clients with an online platform brokers must:

One great advantage of online platforms is the ability to send financial news and research direct to the client in real time. This allows for an international research team to keep the online user up to date. Information, analysis and news are just a click away, enabling an informed investment decision. This can help reduce trade errors, and can be critical over financial data releases or unplanned international events.

Many clients are still finding that they really do need professional assistance to be successful in the markets. The easy access to global markets has not diminished the risks involved. Brokers who can provide more than a slick sales pitch and cheap brokerage rates are becoming highly prized. Cheap brokerage generated by ticking the ‘no service’ box is not always the best option for the trader looking for financial success.

Oh, #@%&! I pressed the wrong button!

Brokers and online platform providers spend a lot of time and effort minimising the chances of errors occurring. But we live in the real world where they can and do occur. One of the more common errors that all brokers see is that of keying in the wrong number of shares or contracts to buy or sell. This can be a simple ‘fat finger’ typo where the order is sent off as buying 10 000 instead of 1000 shares. If the trader’s account has the funds available for this extra trade size, then the transaction will occur and the order will transact in the market.

If an incorrect quantity or code for a stock or futures contract is entered when using a limit order, this can be easily rectified by the client before the transaction occurs. The dramas arise when large ‘at market’ orders are placed and the trade transacts immediately in the market. In this case it is important to contact your broker promptly so attempts can be made to cancel the trade. Brokers can request a trade cancellation from the broker on the other side of the trade. Neither broker is under any obligation to do this.

The trade can be cancelled if the client/broker on the opposite side agrees. They are not obligated to do this. Exceptions to this can occur. If the trade is at a price which doesn’t reflect the current price range and is considered by the exchange to be ’ unfair’, then the exchange has the power to cancel the trade. These are referred to as ’ busted’ trades. If there is a large quantity involved the exchange may halt trading while the trades are cancelled and the orders are sent back to the market.

Smaller operator errors are usually much easier to deal with. A client may, for example, place an order to buy one live cattle contract instead of one feeder cattle contract. Once the mistake is realised, the trader can simply reverse the trade by selling out of the feeder cattle and buying the live cattle. This may result in a small loss to the client, but has not caused too much grief in the market. In the share market if the trader had bought, say, RIO shares instead of CBA shares, the broker could ask to have the trade reversed and the orders reinstated.

Common trading errors

Regardless of the market or instruments being traded, many of the typical errors seen by brokers are the same. Interestingly enough, many of these errors are also the same as the mistakes discussed throughout this book. With education, attention to detail and awareness they can be avoided. Avoiding them will save you money and contribute to the successful operation of a profitable trading business. John Robertson reflects on the most common errors he has witnessed during his career as a ’ local’ on the floor of the Sydney Futures Exchange, a broker for a large brokerage firm, and now as director of his own brokerage business.

Online platforms have enabled the investor to be part of the trading process. This attaches a personal and financial interest to the placing and working of the trade which can interfere with what the actual trading plan is.

Human interference can create increasing problems. I worked the night desk in a big merchant bank in both Euro and USA shifts and if an error was made it was immediately handed over to another operator to exit. This removed the self-interest to the trade. Irrational thinking was removed.

Other important mistakes include the following.

Specific examples of mistakes include:

Markets that don’t trade 24 hours per day, six days per week make market on close (MOC) orders critical to get correct. Carrying a DAX position until next open can ruin your day if the market suddenly reverses or moves against you.

Avoid the grief

Many of these operational errors can be avoided through using common sense. Fully understand the markets you are trading and the platform you are using before diving in feet first. Below are some key actions that will help avoid many of these typical operator errors:

John Robertson, founder of broking firm I-deal Financial Group Pty Ltd, began his trading career on the floor of the Sydney Futures Exchange way back when it was still an open outcry trading ‘pit’. When the floor closed he made the transition to screen trader and then broker for Australia’s largest futures brokers. In this chapter, John explained the pitfalls of operational errors and ways you can avoid them when trading.

John started I-deal Financial Group (<www.i-deal.com.au>) in 2006. The firm specialises in servicing clients using electronic trading platforms and auto-execution trading systems. He has extensive knowledge of the markets and trading in general, having experienced it all from both sides of the fence. His motto is: ‘more markets, more opportunities’.