What is a ‘Fat-Finger Trade’ or Freak Trade?

The National Stock Exchange of India detected a freak trade in weekly Nifty 50 options contact recently. It showed a loss of around Rs 200 crore for traders. Such freak trades are known as the Fat finger Trade. The current freak trade is not just one instance. India has detected such instances in past as well.

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What is a fat-finger trade?

A fat-finger trade is a human mistake when an order is beaten. Such mistakes can contain entering a wrong value concerning price or quantity or selection of wrong execution action like buying or selling. When the freak trade is completed, the price hits an abnormal level for some second but later produces to the level where it should be. For example, in the recent freak trade, the trader managed a sell order at Rs 0.15, in the Nifty 14,500 call option.

What are the Freak Trades?

A Freak Trade is a trade with the error where the price hits an abnormal level for a fraction of a second and then returns to the previous level. The error may occur due to manipulations, human errors, or technical glitches.

Effect of Fat-finger trade

Freak trades or fat-finger trades not only result in a loss to the trader hitting the order. But it also results in a loss for others who may have put a Stop Loss order to their open positions, because Stop Losses may have got activated due to abnormal price movement.

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How Fat-finger trade can be evaded?

The fat-finger trades can be evaded if they are caught in time. Exchanges and brokerages have been producing constant efforts to avoid such trades by placing some preventive actions. They are set filters to give alerts to traders while setting orders outside the parameters of the market. Similarly, price trends are also capped by placing circuit filters and cooling off period.

Loss in Freak trade

When you set a market order by seeing the market price as there is no range of bid orders and anyone can order at any price, you are just presenting your bid in that second, the market fluctuates, and you have to take a loss because of that.

For instance – you are setting a market order in Bank Nifty at a premium of INR 100. At the time of setting the order, some freak trade happens, and your order books at INR 5000, in a fraction of seconds, the price comes back to INR 100, and now you are at a loss of INR 4900 on a single unit.

How to evade FREAK trading?

You should always use a limit order rather than a market order. Always use STOP LOSS. You can also set stop loss in the limit order. If you follow this, you can evade freak trading. To minimize the losses in the case of freak trade, a stop-loss limit order might be a fine option. Many times, freak trades may not be perceptible on the charting platform. It occurs because charts are created by the trading platforms of brokers from the data they get via the exchanges. Hence in the case scenario of a freak trade, it confuses the retail investors for the reason behind their stop loss market orders executed far away from the previous traded price.

 What precisely are fat finger trades, as the name suggests, a fat finger trade is a human mistake that drives the dealer to punch an erroneous order. In the liquid market, fat finger trades are not feasible because you can’t put trades that are off the market price since the deals happen on a price time based on priority.

Yet, such fat finger trades are perfectly feasible in the case of illiquid options where two parties can exchange blocks, that is way off the actual market price or intrinsic value.

As we can imagine, the fat finger trade is a human error or mistake caused by pushing the wrong key when using a computer to input data. Normally, fat finger trades do manage to be harmless but can sometimes have huge importance.

Here we mentioned some important facts regarding the fat finger trade or freak trade. We hope that these notes will help you to know some important facts regarding the topic. You can access our Learning App Entri, to know more informative notes like this.