Golden Finger or Fat Finger
----Evaluation of the reliability in stock trading system
Sep 25, 2013
Introduction and Statement of the project
The stock trading system is always connoted as ‘Golden Finger’ for its amazing speed and striking efficiency to achieve the money snowballing in the stock market. High returns come with high risks. The reliability of the whole trading system is the key point deciding whether the market runs smooth and steady. However, one after another incident has happened during the last few years (Appendix 1) especially the Everbright case last month in different markets reminding us that there exists a snake in the grass within the current trading system. We conduct this project to evaluate the reliability of the trading system and find some feasible methods to low the risk of failure in the system. ‘Fat-finger’ is a colloquial term in securities markets. It generally refers to an incident in which the price, volume, and direction data of the orders are issued to the trading system without conforming to trading intentions, as a result of the trader’s operational error or a glitch in the technical system. According to which aspects of the orders go wrong, the ‘fat-finger’ errors can be categorized into price error, volume error and price and volume error. In terms of the causes, there are operational errors and technical ones. In securities markets, “fat-finger” errors, huge or small, happen every day. It is only those large-scaled and influential cases that have caught our attention. Internationally, exchanges follow the securities laws, regulatory requirements and trading rules of their own countries in dealing with “fat-finger” trades. As countries have different law systems and exchanges’ different trading rules, there has not been yet a unified standard, and accordingly the resolutions differ. But on the whole, in their dealing with ‘fatfinger’ incidents that have frequently occurred in recent years, overseas exchanges take on the following features:
First, except for the canceling of trades with obvious price errors that meet certain standards (of range or transaction amount etc.), most overseas exchanges do not easily invalidate trades. Most of them have the liable parties shoulder the losses on their own.
Second, unless “fat-finger” trades have induced price volatilities that in turn trigger the “Market Circuit Breaker”, overseas exchanges do not usually hold the trading to a temporary halt. Third, it is comparatively difficult for the exchanges to put up intraday announcements when the volumetype “fat-finger” errors occur; but it is relatively easy to identify extreme price-type errors, as a result of which the exchanges are usually able to issue announcements in time.
Shanghai-listed Everbright, one of largest brokerage in mainland China, came in for heavy criticism from investors after its excessive buying orders on a number of stocks led to the Shanghai Composite Index surging by about 6 per cent in two minutes before the end of the morning session on Friday, August 13. Sixteen major stocks rose by their 10 percent daily limit.
The replay of the incident: three batches of buying orders intended to amount to a combined value of 5.5 million yuan ($0.9 million) were entered into the system during the morning session. Instead, 26,082 buying orders worth a total of 23.4 billion yuan ($3.8 billion) were generated within two seconds at about 11:08 a.m. This was well above the daily trade limit.
The China Securities Regulatory Commission s(CSRC) aid after completing an initial investigation that the chaotic trading did not involve human error. It was first thought that the events were triggered by a "fat finger" incident caused by a trader hitting a wrong button and turning trades for 30 million shares into three billion. Rather, CSRC investigators said Everbright had "design flaws" in...
Please join StudyMode to read the full document