What is Fat Finger, an Accident in the Financial Market?

If you've paid even a little attention to the financial markets, you've probably heard the term 'Fat Finger' at least once. It's one of the accidents that occur in the financial markets, and we'll take a closer look at this interesting and very important phenomenon.

What is a Fat Finger Error?

'Fat Finger' is one of the accidents that occur in the financial markets, referring to an error in order price or quantity due to human error. These errors are usually made by traders, brokers, or other financial professionals, and can often lead to unintended consequences.

It typically occurs when using a keyboard or touchscreen to enter large amounts of data, and a finger slips, resulting in the entry of incorrect numbers or symbols. Also, in tense or stressful situations, concentration can decrease, leading to mistakes.

These accidents can occur in a variety of financial products, including stocks, futures, options, and foreign exchange, and can result in significant financial losses or market disruptions. As a result, financial institutions are strengthening their internal control systems and procedures and devoting significant effort to employee education and training.

Causes and Examples of Fat Finger Errors

Main Causes

• Input Error:One of the most common causes, where traders mistakenly enter a price or quantity. In urgent trading situations, mistakes can happen when entering data quickly.
• Terminal Operation Incompetence:Mistakes that occur due to unfamiliarity with the terminal's interface or functions. This is especially common when using newly introduced systems or complex features.
• Stress and Fatigue:When traders experience stress and fatigue due to excessive workload or pressure to meet deadlines, their concentration can deteriorate, increasing the likelihood of mistakes.
• System Errors:Rarely, fat finger errors can occur due to system errors. For example, if the order execution system malfunctions or a network failure causes orders to be delayed or cancelled.
• Conflict of Interest:Some traders may intentionally cause fat finger errors to benefit themselves. For example, they might engage in a large-scale short-selling of a competitor's stock, and then buy that stock at a high price from their own account to manipulate the stock price.

Examples

In February 2018, a trader at the New York Stock Exchange (NYSE) mistakenly placed a buy order for 28 billion dollars (approximately 30 trillion won) worth of Nikkei 225 options in Japan, mistaking 1 yen for 1 dollar. While the trade wasn't executed, it could have caused a major shock to the market if it had been.

Impact of Fat Finger Errors on the Financial Market

They can have a significant impact on the financial markets. The reasons are as follows:

• Increased Price Volatility:Fat finger errors can cause prices of stocks, bonds, foreign exchange, and other assets to fluctuate rapidly. This can increase investor anxiety and threaten the stability of the financial markets.
• Trading Losses:If traders mistakenly enter prices or quantities and execute trades, they can incur significant losses. This can weaken the financial health of institutions and erode investor confidence.
• Strengthened Regulations:Financial regulators are strengthening regulations to prevent fat finger errors. For example, they are implementing measures such as strengthening pre-trade verification procedures and enhancing trader education and training.
• Liability Issues:Investors who incur losses due to fat finger errors can demand compensation from financial institutions. This can increase the financial burden on institutions and potentially lead to legal disputes such as lawsuits.

These series of events can undermine the stability and credibility of the financial markets, so each financial institution must establish and continuously improve a thorough internal control system to prevent such accidents.

Analysis of Representative Fat Finger Error Cases

Some representative cases are as follows:

• Dow Jones Index Plunge on May 6, 2010:This was caused by a trader mistakenly entering a sell order for 10 million shares instead of 1 million shares. As a result, the Dow Jones index plummeted by over 9% in a flash, and the market fell into turmoil.
• Sharp Drop in US Treasury Prices in December 2013:This occurred when a trader mistakenly placed a sell order for $10 billion worth of US Treasuries instead of $1 billion. It caused a sharp drop in US Treasury prices and sent shockwaves through the market.
• Royal Bank of Canada (RBC) Massive Loss on March 16, 2020:An employee mistakenly entered a '0' key twice on the computer keyboard, resulting in a loss of 1.5 billion Canadian dollars (approximately 1.2 trillion won).

As shown in the above examples, even small mistakes can have a huge impact in the large-scale financial market. Therefore, those working in financial institutions must always be cautious and handle their work with care.

Financial Institution Countermeasures to Prevent Fat Finger Errors

Various countermeasures are being implemented to prevent these accidents. The main countermeasures are as follows:

• Double Verification System Introduction:This is a system that requires orders and transactions to be verified twice. For instance, when entering the order amount or quantity, the system automatically checks for errors or requires a responsible person to verify it.
• Transaction Limit Setting:This limits the amount or quantity a trader can trade at one time. It can prevent errors caused by excessive trading.
• Monitoring System Establishment:By continuously monitoring transaction records in real-time and taking immediate action when suspicious activity is detected, it is possible to prevent accidents.
• Strengthened Education:Employees receive education on the characteristics and risks of the financial market, and training to prevent errors.

Through these countermeasures, it is possible to prevent fat finger errors and maintain the stability of the financial markets.

How Individual Investors Can Prevent Fat Finger Errors

Investors can also take measures to prevent them. Here are some examples.

• Habitual Pre-Order Verification: It is important to double-check the amount and quantity. It's also a good idea to use the notification feature in the brokerage app to check the order execution status in real time.
• Enhanced Password Security:Change your password regularly and be careful not to expose it to others.
• Avoid Excessive Leverage:Leverage can increase returns, but it also increases the potential for losses, so it should be used with caution.
• Invest with Discretionary Funds:If you suddenly need money, you may have to stop investing or sell at a loss, so it's important to have extra funds available.

By taking these steps, individual investors can prevent fat finger errors and invest safely.

Market Recovery Process After a Fat Finger Error

When an accident occurs, financial authorities respond quickly and work to stabilize the market.

• Cause Identification and Action: They first identify the cause and can take actions such as imposing sanctions or fines on the institution involved.
• Investor Protection: They provide compensation to affected investors or take measures to prevent further damage.

Due to these efforts, the market usually recovers quickly. However, in the case of major accidents, recovery can take time, and it takes a lot of effort to restore investor confidence.

Technological Approaches to Preventing Fat Finger Errors in Future Financial Markets

Development of Various Technological Approaches

• Automated Systems: Automated order and trading systems are being built to minimize human error, preventing fat finger errors.
• Artificial Intelligence Technology: Advanced artificial intelligence technology is being used to detect anomalies in trading and build systems that automatically cancel or block trades.

These technological approaches are expected to play a major role in preventing fat finger errors and increasing the stability of the financial system in the future.

Fat finger errors, one of the accidents that occur in the financial market, can lead to significant losses due to a small mistake, so it's important to always be careful.