Fat Finger Error

What Is a Fat Finger Error?

A Fat Finger Error occurs when an employee or a person with a critical position in a firm makes an error in input, such as inputting data or taking an unintended action. Many cases have involved companies that have lost significant amounts due to such errors.

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 lot of money. 

While firms may have mitigations in place, fat finger errors can still result in significant financial losses if not adequately prevented or detected.

Depending on the organization and the employee's role, individuals may have decision-making power that could potentially impact the company financially, including through fat finger errors.

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.

Understanding Fat Finger Error

To understand the Fat Finger Error, consider a hypothetical example in which a company trading a 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, 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 placing 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."

Fat finger trades can involve large volumes, potentially leading to rapid changes in markets and even flash crashes in many cases.

This example illustrates that fat finger errors can have costly implications for firms. Still, the extent of the financial impact may vary depending on factors such as the size of the error and market conditions.

Examples of Fat Finger Trading Errors

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 company, sees a Fat-Finger trade that costs the bank more than $50 million. The trade was large enough to cause 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' ticker symbol was ZOOM at the time, which was 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.

Preventing Fat Finger Errors

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.

Implementing preventative action is crucial for firms to avoid incurring significant losses due to human errors, along with other measures such as training, supervision, and system enhancements. Here are a few methods that firms can implement to avoid these unusual scenarios:

1. Automation

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.

Firms are increasingly adopting automated systems for various purposes, such as making client payments or managing inventories. As a result, these systems are becoming more reliable and reducing business operating costs.

2. Limits

Firms can set predetermined limits in their systems to prevent erroneous transfers or trades. Many trading firms that regularly make large trades have adopted this solution.

Setting a limit prevents suspicious transactions from going through, 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.

4. Authorization

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 consider implementing a combination of the abovementioned methods to mitigate the risk of fat finger errors, which can potentially lead to significant financial losses. History repeatedly shows 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 Fat Finger Errors

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 must ask themselves such questions and more in these complex situations. Moreover, it dives into the realm of ethicality and morals.

Conclusion

To summarize, the fat finger error is a large-scale error caused by wrong inputs. It is called 'fat' because it signifies a significant mistake resulting from erroneous inputs, with potential substantial consequences 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 judge a person based on such a mistake immediately.

Firms that experience fat finger errors may encounter difficulties in recovering losses, particularly in cases involving large sums sent to individuals or entities where immediate recovery is not feasible.

Given how big companies are getting in the modern age and their influence on industries and investments, there are often unique complexities.

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