On the importance of sanity-checking values where money is involved


Last year, one of my colleagues noticed that one particular company's stock, which normally trades in the mid- to upper-$20 range, showed one day of extremely unusual results, very similar to the last example in this series of funny screenshots.

XYZ Company (NASD:XYZ) - Delayed quote data
28.06 Daily Range 27.92 – 100000.00
1:18PM ET

Closer inspection revealed that there was an order to buy 28 shares at $100,000.

Obviously, somebody got the "number of shares" and "bid price" fields backwards and ended up losing over two million dollars for the error. If this were an NYSE stock, this error would have been caught because trades on the New York Stock Exchange are still executed by human beings on a trading floor, so somebody would have said, "Wait, the two fields are clearly in reverse order" and fixed the error or at least double-checked with the buyer before executing it. (At least I hope so. Maybe the people on the floor don't care.)

But nope, this is NASDAQ, and some lucky market maker walked off with over two million dollars. Maybe the unlucky trader's software will now display a warning if the price entered is more than, say, twice the current market price. (With appropriate exceptions for penny stocks.)

In response to the unusual price activity, another colleage chimed in, "Rats! This always happens to me. I had a limit order at $100,001."

Comments (13)
  1. sheriffpony says:

    This looks like a limit sell, not a buy; you got the sign wrong. 1) It never would’ve executed, 2) NASDAQ would rip up the trade even if your version of events was right. All exchanges routinely cancel erroneous trades.

  2. acq says:

    All exchanges routinely cancel erroneous trades.

    Not really:

    http://www.elitetrader.com/vb/showthread.php?threadid=60203

    "Fukuda said the error has cost Mizuho 224 million USD in unrealized losses (…) Mizuho’s brokerage wrongly put an order to sell 610,000 shares for 1 yen each, he said. It had intended to sell 1 share for 610,000 yen for a client.

  3. laonianren says:

    So a message box appears:

    "Your trade appears to be insane.  Are you sure you want to continue?"

    And the trader hits "Yes" while muttering about stupid computers getting in the way of his job.

  4. JZ says:

    NASDAQ does have a policy for things like this: http://www.nasdaqtrader.com/Trader.aspx?id=ClearlyErroneous

    I enjoy the ambiguity of "Clearly Erroneous Transaction Policy."

  5. porter says:

    How about

    "You are clearly insane, do you want to continue?"

  6. David Hayes says:

    This happens, most exchanges will cancel the trade and/or suspend trading on the stock if something like this happens. You’ll get a big slap on the wrist from the exchange so most trading systems will refuse a trade more than a certain distance from the last traded price.

  7. Harshdeep says:

    A similar thing happened yesterday – http://harshdeep.wordpress.com/2009/06/08/biggest-stock-price-movement-ever. I’m not sure if it was a "clearly erroneous transaction" or some parsing error by Google.

  8. silky says:

    well, not only is sanity checking relevant, but the physical layout of the interface is critical.

    you wouldn’t pop something up, probably you’d re-confirm and show a list of previously entered data, highlighting just how out of range the entered one is.

    there could also be a seperate confirmation to check the state of your position after the trade. if you see you still have 99972 shares, you may question things.

  9. Jules says:

    The odd thing about the image in the link is that, based on the location of the arrow, what the submitter seems to be saying is: look, "last close" is outside of the range in "day’s range".  Which is, of course, to be expected.

    I’ve seen stuff like this happen on LSE, too, which is manually traded like NYSE.  Not to quite that extreme, but (for example) I remember investigating a glitch in one of our systems here that was caused when the price for a share dropped momentarily from 450ish to 45.

  10. Scott says:

    If this trade actually went through, could that trigger limit orders?

    That’s kind of scary if so.

  11. The deep issue here is that users use automations as if they were paper forms, where you can overflow the boxes, put things in the wrong places, scribble notes in the margins, and reasonably hope that somebody will understand what you meant.  This comes to the design of legacy business processes, which sometimes cannot be automated without forcibly reducing the human heuristics that have gone into them for years.

  12. keith says:

    Unless this is a thinly-traded stock, it does not make sense that the order would be filled at 100K.  If there was an order for 28 shares with a 100K limit price, it could be fulfilled by any market trade less than 100K (the limit price is a cap, not necessarily the actual price; I believe the contract language is "<my price> or better").  Again, unless this was a very illiquid stock, or the buyer used after-hours trading, or other non-normal approach, I would expect some trader or organization (for example a value-based mutual fund or hedge fund) with an interim price based on a fair-value metric (say "the price at 30x P/E", which, if we’re generous for the example could be up to 10x the current price, say $270; there are surely people who dial in a ten-bagger in a GTC limit order) sell limit order on the books.  If the exchange filled this order at $100K before filling any booked intermediate sell limit orders, they failed all limit sellers, not just the insane buyer.  Plus, with just 28 shares in the trade, that should be fast to clear the market at a one-uptick market price.  

    Or does the quotation range just show recent and active quotes and bids, not necessarily the actual amounts at which trades occured (in which case, one would expect the price to uptick steadily from the entry of the market until the buy was filled; with only 28 shares, it’s probably been filled at a little higher than the steady state, but not extremely; and the bid is still recent enough to populate the trading range)?

  13. Aaron G says:

    My brokerage/trading software actually does do this.  I’ve seen a warning to the effect of "your limit price is very far off from the current market price", and that warning has to be checked before the trade is accepted.

    The irony is that the amount was perfectly sane, but because I was entering the trade just before market open, it was showing the market price as $0.00, so it was actually their error, not mine.

    @keith: Limit orders are a service that brokerages provide to retail investors.  If you ARE the brokerage, or some other institution, or you use the ECN, you have the ability to put in orders for a specific price.  That’s how the stock market really works on the inside; a "market" order through your brokerage is just a proxy buy/sell order at the current ask/bid price.

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