Vardhaman Global Sharecom Pvt Ltd has written a letter to market regulator Securities and Exchange Board of India (SEBI), the National Stock Exchange (NSE) and NSE Clearing Ltd to ‘look into’ a punching error (called fat finger trade in trade lingo), which could have caused a loss of Rs200 crore to Rs250 crore. After the fat finger trade that crashed the market in November 2012, this is, by far, the largest trading mistake executed by a broker in India. How was this done?
On Thursday 2 June 2022, between 2:37pm and 2:39pm, a trader sold 25,000 lots (12.5 lakh shares) of Nifty Call options at 14,500 strike which was illiquid and deep in the money, at an extremely low price of Re0.15 (or 15 paise) as compared to the market price of Rs2,100. One lot of Nifty contracts is for 50. The call option of 14,500 was deep in the money as Nifty was trading around 16,600.
The trader then had to square off its trade after realising the mistake of punching the wrong strike at much lower quote and, therefore, he bought back the sold quantity at a much higher price of Rs2,100. This resulted in a sudden price drop and rise in the Nifty Call options of 14,500 strike in a matter of minutes from Rs2,100 to 15 paise and then back to Rs2,100. This trade is estimated to have caused a loss of anywhere between Rs200 crore to Rs250 crore.
Vardhaman Global’s letter explains what the problem was: “Client had a position of 12,86,350 PE of expiry 2nd June which they were trying to square off but due to an error 14,500 CE was sold at market. This led them to sell 1,000,000 call at market at an average price of 399.43640 instead of 2130.”
Perhaps the trader was trying to sell 16,500 call options as the Nifty was trading around 16,600.
The trade was evident by the market data wherein the open interest was just 7,228 contracts but the volumes were much higher at 56,872 contracts.
In simple terms, a call option seller expects the underlying asset to fall and he will receive the premium paid by the buyers. This was a classic example of fat finger trade which is due to human error of a wrong key being pressed while using the keyboard to input data into the system.
Such trade fiascos are not new and have a history of their own. Here, the fat finger led the trader to sell 14,500 call options instead of 16,500 call options.
Fat finger has led to many losses across the globe in stock market exchanges as well as banks. In October 2012, Emkay Global Trader executed a trade which led to almost 15% decline in Nifty.
In 2014, an inflated order for some well-reputed companies on a Japanese exchange led to a loss of US$600 billion. In 2018, Deutsche Bank transferred US$28 billion into various accounts. In 2007, Gold futures in New York saw a spike in volume and the Gold futures, subsequently, fell 1.6% on Comex, which was said to have been due to a mistaken trade of 18,149 lots instead of 18,149 ounces.
At that time, David Govett, head of precious metals trading at Marex Spectron Group in London, said: “No one has a clue, apart from the unfortunate individual that pressed the wrong button.”
Another incident in the Philippines led to 40% plunge in airlines' share after one erroneously entered a sell order at a low price of 58 pesos against 98 pesos.
“Other brokers went in and bought the order,” said Rens Cruz, an analyst at Regina Capital Development in Manila.
Few brokers and exchanges have built an in-house fat-finger trade-proof system wherein they filter to catch and stock such trades. Sometimes, parties involved in such trades settle the issue among themselves whereas insurance is also taken to mitigate such losses.
In August 2021, NSE was looking to curb fat finger trades in options, but the progress could not be ascertained.