If you have paid even a little attention to the financial markets, you may have heard the term "Fat Finger". This is one of the accidents that happen in the financial markets, and we will take a closer look at this interesting and important phenomenon.

What is a Fat Finger Error?

One of the accidents that occur in the financial markets, "Fat Finger", refers to an error in order price or quantity due to human error. These mistakes are mainly made by traders, brokers, or other financial professionals and can often lead to unexpected consequences.

It often occurs when fingers slip and enter the wrong numbers or symbols while entering large amounts of data using a keyboard or touchscreen. Also, in stressful situations, people may lose focus and make mistakes.

Such accidents can occur in various financial products, including stocks, futures, options, and foreign exchange, and can result in significant financial losses or market turmoil. As a result, financial institutions are strengthening their internal control systems and procedures and putting a lot of effort into employee education and training.

Causes and Examples of Fat Finger Errors

Major Causes

• Input Error: One of the most common causes is when traders enter the wrong price or quantity. In urgent trading situations, mistakes can be made when entering data quickly.
• Terminal Operation Inexperience: Mistakes that occur due to unfamiliarity with the terminal's interface or functionality. This is especially prone to occur when using newly introduced systems or complex functions.
• Stress and Fatigue: When traders feel stressed and fatigued due to excessive workload or pressure to meet deadlines, their concentration may decrease, increasing the likelihood of mistakes.
• System Error: Although rare, system errors can also cause fat finger errors. For example, a malfunctioning order execution system or a network failure that delays or cancels orders.
• Conflict of Interest: Some traders intentionally cause fat finger errors to benefit themselves. For example, after short-selling a competitor's stock in large quantities, they buy the same stock at a higher price from their own account to manipulate the stock price.

Examples

In February 2018, a trader at the New York Stock Exchange (NYSE) mistook 1 yen for 1 dollar while trading Nikkei 225 index options, placing a buy order worth $28 billion (about 30 trillion won). Although the actual trade did not go through, it would have had a significant impact on the market if it had been executed.

Impact of Fat Finger Errors on the Financial Market

It can have a significant impact on the financial markets. Here's why:

• Increased Price Volatility: Fat finger errors can cause the prices of stocks, bonds, foreign exchange, etc., to fluctuate rapidly. This can amplify investor anxiety and undermine the stability of the financial markets.
• Trading Losses: When traders enter the wrong price or quantity and execute a trade, significant losses can occur. This can worsen the financial position of financial institutions and erode investor confidence.
• Strengthened Regulations: Financial authorities are strengthening regulations to prevent fat finger errors. For example, they are taking measures such as strengthening verification procedures before trading and enhancing trader education and training.
• Liability Issues: Investors who suffer losses due to fat finger errors may demand compensation from financial institutions. This can increase the financial burden on financial institutions and may lead to legal disputes such as lawsuits.

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

Analysis of Typical Fat Finger Error Cases

Here are some typical examples:

• May 6, 2010, Dow Jones Index Plunge: It was caused when a trader mistakenly entered an order to sell 10 million shares instead of 1 million shares. This caused the Dow Jones Index to plummet by over 9% in an instant, plunging the market into chaos.
• December 2013, Sharp Drop in U.S. Treasury Prices: It occurred when a trader mistakenly placed an order to sell $10 billion worth of U.S. Treasuries instead of $1 billion. This caused U.S. Treasury prices to plummet, causing significant shockwaves in the market.
• March 16, 2020, Massive Losses at Royal Bank of Canada (RBC): An employee mistakenly entered the "0" key twice on their computer keyboard, resulting in a loss of C$1.5 billion (about 1.2 trillion won).

As these examples show, even a small mistake can have a huge impact in the financial markets, where the amounts are large. Therefore, financial institution employees must always pay attention and handle their work carefully.

Financial Institutions' Countermeasures to Prevent Fat Finger Errors

To prevent accidents, they are implementing various countermeasures. Here are some typical countermeasures:

• Double-Check System Introduction: A system that requires multiple checks for orders or trades. For example, it automatically checks for errors when entering the order amount or quantity, or it requires a responsible party to check.
• Trade Limit Setting: This limits the amount or quantity that a trader can trade at one time. This helps prevent mistakes caused by excessive trading.
• Monitoring System Establishment: This monitors trade records in real-time and allows immediate action if any suspicious activity is detected, helping prevent accidents.
• Enhanced Education:Employees are educated about the nature and risks of the financial markets to prevent mistakes.

Through these countermeasures, fat finger errors can be prevented, and the stability of the financial markets can be maintained.

How Individual Investors Can Prevent Fat Finger Errors

Investors can also take steps to prevent them on their own. Here are a few examples:

• Develop a Habit of Checking Before Placing Orders:You need to double-check the amount, quantity, etc. Also, using the notification function of the brokerage app to check order execution in real-time is a good practice.
• Strengthen Password Security: Change your password regularly and avoid exposing it to others.
• Avoid Excessive Leverage: Leverage can increase returns, but it can also increase losses, so it should be used cautiously.
• Invest with Spare Money:This is because if you need money urgently, you may have to stop investing or sell at a loss.

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

Market Recovery Process After a Fat Finger Error

After an accident occurs, financial authorities will take swift action to stabilize the market.

• Identifying Causes and Taking Action: First, they will determine the cause and take measures such as imposing penalties or fines on the relevant institutions.
• Investor Protection: They will provide compensation to affected investors or implement measures to prevent further damage.

Due to these efforts, the market recovers quickly in most cases. However, for major accidents, it may take time to recover, and a lot of effort is required to restore investor confidence.

Technological Approaches to Preventing Fat Finger Errors in Future Financial Markets

Development of Various Technological Approaches

• Automated Systems: Establish automated order and trade systems that can minimize human error to prevent fat finger errors.
• Artificial Intelligence Technology: Utilize advanced AI technology to detect anomalies in trading and build a system that automatically cancels or blocks trades.

These technological approaches are expected to play a significant role in preventing fat finger errors and enhancing the stability of financial systems in future financial markets.

Like the "Fat Finger" errors that occur in the financial markets, a single small mistake can lead to big losses, so always be careful.