See you in courtIn electronic derivative markets, erroneous order entries are common. Confusing price with quantity, accidentally leaning on the immediate sell buttons or setting automated trading functions in motion while experimenting with different parameters, messing up calls and puts – painful.
These fat finger trades can definitely ruin your day, your career or even worse. No software limitations or exchange rules can guarantee full safety, as traders will come up with new ways to screw up.

Liquidity as cushion

Liquidity is usually deep enough with tight spreads to cushion regular errors. When you still make a mistake which would qualify for “obvious mistake”, the exchange is your last hope. Mistrade regulations can offer rescue in some situations.

AFS in the roll

Back to the stone age, around the turn of the century. The well-known Dutch broker AFS Capital Management screw up an execution in the index future roll in the AEX. Trying to roll-over 193 February futures to March, the broker forgot to add the credit in the limit order. Instead of receiving 2,30 for the roll, they paid 2,30 for the spread. That’s a difference of 4,60 euro and a 175.000 euro loss.

No mistrade

Even in the good old open outcry world of 2001, this was a clear case : mistrade. However, Euronext market observers refused to delete the trade.This marked the start of a seven year legal battle, as AFS sued the exchange. The court has decided the loss of 175.000 to be split among the broker and the exchange. The broker screw up in the first place, and the exchange should have deleted the trade. It definitely was an obvious mistake, according to the judge.

Lawyers discussing mistrades

The legal fight between lawyers who haven’t got a clue about derivative trading discussing an obvious mistrade is entertaining to read. Sadly it’s in Dutch only, but here are the highlights.

Euronext:
It wasn’t a mistrade. One leg of the future roll was traded at the normal price, and the other one 4.6 too low. But hey, with an index level of 620 this is only 0.75% away from the theoretical price.

Court:
That’s bullshit. The future-roll was traded as one combination, and the deviation from the fair value should be measured from the combined price. Besides, everybody knows long term futures are more expensive than short term futures with the same strike price. (huh? Strike price in futures? Longer term futures are always more expensive? Somebody is messing up futures with options here)

Euronext:
AFS should have made a deal with the counter parties (AOT and IDE), as IDE offered to close a deal and give back half their profit on the trade (friendly of those guys, I wouldn’t do that). Otherwise, AFS should have sued their counter parties (yeah, right).

Court:
Euronext should just have deleted the trade, and no agreement with the counter parties would have been necessary.

Euronext:
AFS started this shit with mistakes

Court:
True. They should feel the pain.

AFS:
Euronext’s order system sucks.

Court:
Yeah, it’s complicated stuff. I agree.

Jack
Jack