Fat Finger Error
It is a situation where an employee or a person with a critical position in a firm makes an error making an input, such as inputting data or taking an unintended action.
A Fat Finger Error is a situation where an employee or a person with a critical position in a firm makes an error making an input, such as inputting data or taking an unintended action. There have been many cases where such errors have cost companies significant amounts.
Employees have several responsibilities and duties as required by their jobs. However, individuals can often make mistakes that can potentially have a direct impact on a company.
The Fat Finger Error is one such instance where an individual can make a costly mistake because of a "fat finger" or a human error on a computer.
For instance, an employee can press the wrong key and accidentally cost their company a large sum of money.
Usually, such errors are harmless because firms already have mitigations to prevent such scenarios. Moreover, it is usually the case that employees do not have the decision-making power to take actions that could cost large firms sums.
This is because several people verify important decisions before being executed. Thus, such errors have a low chance of occurring. Even so, there are many actual instances where these scenarios have taken place.
To understand the Fat Finger Error, consider a hypothetical example where a company trading significant stock sends one of its traders an order to purchase 10,000 shares of Tesla (NASDAQ: TSLA).
However, the trader makes an error placing the buy order and instead adds an extra zero, making the order quantity 100,000, thus, making it ten times larger than the company intended it to be.
You can imagine that the company will take immediate action to correct such an error, especially in cases where the firm has not taken preventative action to cause such scenarios, such as putting in place an order limit.
Fat finger errors have been prevalent in trading securities by large firms such as large financial institutions like hedge funds. The industry refers to such errors as "fat finger trades" or "freak trades."
These freak trades are large in volume and thus can change markets quickly. Even causing flash crashes in many cases. This example illustrates that the Fat Finger Error can have expensive implications for firms.
This section will discuss many actual incidents of an individual making a Fat Finger Error that had a notable financial impact on a firm.
Here are some real examples of fat finger errors:
- June 2022 - Citigroup (NYSE: C), an American Multinational investment and finance, sees a Fat-Finger trade that costs the bank more than $50 million. The trade was large enough to have caused a flash crash in the European Markets.
- April 2018 - Deutsche Bank AG (ETR: DBK), Germany's largest lender, mistakenly sent $35 billion an exchange as part of its periodic payment to manage derivative dealings. The error was quickly identified, with no financial harm.
- April 2018 - An employee at Samsung Securities Co, one of South Korea's largest brokerages, tried to pay employees 1,000 won ($0.93) as compensation through dividends.
- However, the employee transferred 1,000 shares of Samsung Securities worth 112.6 trillion won, or 30 times the company's market cap. The error caused a 12% fall in share price as sixteen employees quickly liquidated their shares.
- October 2015 - Deutsche Bank AG (ETR: DBK) transfers $6 billion to a U.S hedge fund because an employee mistakenly processed a gross figure instead of a net value, causing a much higher transfer than intended. The amount was recovered the next day.
- During the beginning of the COVID-19 pandemic, many traders mistakenly bought shares in Zoom Technologies Inc (ZTNO) instead of Zoom Video Communications (NASDAQ: ZM), causing ZTNO to rise by about 1800% in a matter of weeks.
- Zoom Technologies had a ticker symbol of ZOOM at the time, which later changed to ZTNO to avoid confusion among traders.
The examples above are just a few that illustrate a human error's impact at scale. It is also interesting to observe how these companies deal with such mistakes, especially in cases where the loss is non-recoverable.
Moreover, firms undoubtedly incur a negative reputation when such news breaks out. Investors quickly question management control and processes. Thus, the market sentiment concerning the firm may always be tainted.
Mitigating Fat Finger Error
As discussed before, large companies have incurred huge losses due to human error. Therefore, firms need to place measures to mitigate and prevent such mistakes.
Preventative action is the most valuable action firms can take to avoid incurring significant losses due to human errors.
Here are a few methods that firms can implement to avoid these unusual scenarios:
Merging Automotive elements into procedures can help prevent errors. For example, a trading firm can use automation to trade based on algorithms and signals, thus reducing the chance of human error.
Today, firms are increasingly adopting automated systems for various purposes, such as making payments to clients or managing inventories. As a result, these systems are becoming more reliable and reducing business operating costs.
Trading firms, for instance, may make thousands of trades in a single day. Implementing an autonomous system means that the system can directly feed into the system and place orders.
Firms can set predetermined limits in their systems to prevent erroneous transfers or trades. This solution has been adopted by many trading firms that regularly make large trades.
Setting a limit means that suspicious transactions can be prevented from going through, thus giving management time to identify and avoid errors.
3. Algorithms/Error check systems
Error-checking systems can be created based on a firm's transaction data; these systems can use prior transaction history to predict the future volume of transactions.
Therefore, the autonomous system can flag suspicious transactions based on prior history.
Firms can require employees to seek authorization from management for any transaction above a specified amount. This method can be implemented immediately and effectively to prevent human error and fraudulent transfers.
Companies should implement a mix of all the methods described above to reduce the likelihood of fat finger errors with enormous cost implications. In addition, history repeatedly has shown that firms can face legal consequences in such situations.
Moreover, another benefit of a firm having robust systems is that fraudulent transfers can be prevented and identified.
Ethical responsibility in case of a Fat Finger Error
This section will dive into a discussion regarding taking personal responsibility in case of such an error. Remember that anyone might make a mistake, irrespective of skill level while working. Thus, it is a difficult discussion to have when trying to hold an individual responsible.
Human error is common, from the workplace to daily activities involving inputting information. Usually, such errors create issues that are nothing more than a hassle, such as an employee making an input mistake when creating a financial model.
The employee will likely find their mistake and immediately try to correct it, thus avoiding/correcting the error before costing the company any actual loss.
However, in the case of a costly mistake, such as those actual incidents where human error has cost firms millions of dollars, several questions can be asked:
- Is it right to put all the blame on the employee making the error?
- How can managers deal with such issues if preventative action has failed?
- In the end, who should be held responsible and incur the cost?
As you can imagine, company management needs to ask themselves such questions and more in these complex situations. But moreover, it dives into the realm of ethicality and morals.
There is likely no one right way to deal with a Fat Finger Error. Given that every situation is different, specific factors must be considered before management rushes to point the finger at one individual or group for the error.
To summarise, an error that is large in scale and caused because of wrong inputs is the Fat Finger error. The error is referred to as "fat" because it has caused enormous cost implications for a firm or entity.
Although chances for such errors are low, anyone can make a simple error that can have enormous consequences and lead to complexity. Therefore, it is wrong for a firm to immediately judge a person based on such a mistake.
Firms that deal with such errors usually have much trouble recovering the losses, especially in cases where a large amount has been sent to an individual(s) or an entity from which it cant be immediately recovered.
Given how big companies are getting in the modern age and their influence on industries and investments, there are often unique complexities.
Suppose you are an employee who works in a firm where it is plausible to make such errors. Then, an error check protocol should be implemented after every significant task to prevent such disasters.
Moreover, you can voice your opinion to push your company to implement systems that reduce the chances of these types of occurrences. Such a move can save you or your co-workers from a potentially tricky situation.
Everything You Need To Master Algo Trading using Python
To Help You Thrive in One of the Most Future Proof Careers on Wall Street.
Research and authored by Imran Husain l Linkedin
Reviewed and Edited by Abhijeet Avhale | LinkedIn
To continue learning and advancing your career, check out these additional helpful WSO resources:
or Want to Sign up with your social account?