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 huge implications, depending on how widespread their impact is and how long it takes to catch them. Most errors in trading, either human or machine, can be contained if caught in time and canceled. Fat finger errors are often harmless but can sometimes have a significant market impact. Fat finger errors can be prevented if firms set limits on the dollar or volume amount of orders, require authorizations for trades over a certain dollar value, and use algorithms and other computerized processes to enter trades, versus having traders enter them manually. A few examples of fat finger trading errors include the following: A fat finger error was blamed for causing a 6% plunge in the British pound in 2016. For example, if a trader receives an order to sell 1,000 shares of Apple Inc. (AAPL) at the market price and incorrectly enters 1,000,000 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.
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.
Understanding Fat Finger Error
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. (AAPL) at the market price and incorrectly enters 1,000,000 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.
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.
Fat finger errors can be prevented if firms set limits on the dollar or volume amount of orders, require authorizations for trades over a certain dollar value, and use algorithms and other computerized processes to enter trades, versus having traders enter them manually.
Examples of Fat Finger Trading Errors
A few examples of fat finger trading errors include the following:
Preventing Fat Finger Errors
The following processes and procedures may reduce fat finger errors:
Related terms:
American Stock Exchange (AMEX)
The American Stock Exchange (AMEX), now known as the NYSE American, was once the third-largest U.S. stock exchange and dates back to the 18th century. read more
Automatic Execution and Example
Automatic execution helps traders implement strategies for entering and exiting trades based on automated algorithms with no need for manual order placement. read more
Cancellation
A cancellation is a notice sent by a broker to a client, informing them than an erroneous trade has been made and is being rectified. read more
Commodity Futures Trading Commission (CFTC)
The CFTC is an independent U.S. federal agency established by the Commodity Futures Trading Commission Act of 1974. read more
Flash Crash
A flash crash is an event in electronic markets wherein the withdrawal of stock orders rapidly amplifies price declines. read more
Manual Trading
Manual trading involves human decision-making for entering and exiting trades, rather than relying on computers and algorithms. read more
New York Stock Exchange (NYSE)
The New York Stock Exchange, located in New York City, is the world's largest equities-based exchange in terms of total market capitalization. read more
Program Trading
Program trading refers to the use of computer-generated algorithms to make trades in large volumes and sometimes with great frequency. read more