What is a big toe error?
A big toe error is a human error caused by pressing the wrong key when using a computer to enter data.
- A big toe error is an error caused by a human, as opposed to a computer, in which the wrong information is entered.
- Big toe bugs are often harmless, but they can sometimes have huge implications, depending on how widespread their impact is and how long it takes to detect them.
- Most errors in trading, whether human or mechanical, can be contained if caught early and canceled.
Understanding the big toe mistake
Big toe errors are usually harmless, but can sometimes have a significant impact on the market. For example, if a trader receives an order to sell 1,000 shares of Apple Inc. (AAPL) at market price and incorrectly enters 1,000,000 shares to sell on the market, the sell order has the potential to transact with each order of purchase at the offer price. until it fills up.
In practice, most brokerage firms, investment banks, and hedge funds establish filters on their trading platforms that alert traders to entries outside typical market parameters or to prevent erroneous orders from being placed. Most U.S. exchanges, such as the New York Stock Exchange (NYSE), NASDAQ, and the United States Stock Exchange (AMEX), require erroneous trades to be reported within 30 minutes of the execution.
In the wake of the “sudden crash” on May 6, 2010 that caused a significant, rapid, and unexpected drop in US stock indices, one of the first explanations was a big toe error. The idea was that a merchant had entered an order incorrectly, placing the order in billions instead of millions.
However, after further investigation, the Federal Bureau of Investigation (FBI) and the Commodity Futures Trading Commission (CFTC) determined that the sudden drop was in fact caused by fake sell orders placed by a trading algorithm. high frequency.
Big toe errors can be avoided if companies set limits on the dollar or amount of order volume, require authorizations for trades above a certain dollar value, and use algorithms and other computerized processes to enter trades. , rather than having the operators enter them manually.
Examples of fat finger trading mistakes
Some examples of big toe trading mistakes include the following:
- A big toe error was blamed for causing a 6% drop in the British pound in 2016.
- A Deutsche Bank junior employee mistakenly sent $ 6 billion to a hedge fund in 2015 after incorrectly entering “gross number” instead of net worth. Deutsche Bank recovered the funds the next day.
- In 2014, a Mizuho Securities trader accidentally placed orders for more than $ 600 billion in leading Japanese stocks; price and data volume were entered in the same column. Fortunately, most of the orders were canceled before being executed.
Prevention of big toe errors
The following processes and procedures can reduce big toe errors:
- Set limits: Businesses can minimize big toe trading errors by setting filters on their trading platforms. A filter could be set to prevent a trade from taking place if it is above a specific dollar amount or volume, for example if an order exceeds $ 2 million or 500,000 shares.
- Authorization: Requiring authorization for operations that exceed a specific amount can reduce big toe errors. For example, a securities firm may require the principal operator to authorize and release transactions that exceed $ 500,000.
- Automation: Using straightforward processing and trading algorithms to enter orders minimizes the risk of big toe errors. Manually placing a large number of orders during a trading day can be tedious, increasing the likelihood of errors. Orders that go directly into the company’s business system reduce the risk of human error.