What exactly was the NSE fat finger trade?


by 5paisa Research Team Last Updated: Jun 03, 2022, 05:10 PM IST

On Thursday 02nd June, there was an anomalous trade in the weekly options on the Nifty. A large quantity of call options of 14,500 strike were exchanged at a price of Rs.0.15 or 15 paisa. That is not anything to be surprised about.

What is actually surprising is that this trade happened when the Nifty was nearly 2,130 points in the money. When an option is in the money, it has at least as much as its intrinsic value. In this case, the intrinsic value was Rs.2,128 but the trade happened at Rs.0.15. That was the fat finger trade on Thursday.

What exactly are fat finger trades. As the name suggests, a fat finger trade is a human error that causes the dealer to punch an erroneous order. In the liquid market, fat finger trades are not possible because you can’t put trades that are off the market price since the deals happen on the price time priority basis.

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

As we can infer, fat finger trade is a human error caused by pressing the wrong key when using a computer to input data. Normally, fat finger trades do tend to be harmless but can sometimes have huge implications. That was the case on 02nd June.
 

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In this case, the seller of the call option would have ended up with potential losses of Rs.266 crore and we will look at these calculations in much greater detail later on. In certain freak cases, the impact can be widespread and disrupt the market as a whole, like in the US in 2010.
 

What exactly was the fat finger trade on the NSE on 02nd June?


On Thursday, the NSE derivative segment (futures and options) witnessed a fat-finger trade of a large quantity of Nifty 50 options contracts. These options had a strike price of 14,500 Nifty and the entire deal was executed at Rs.0.15 per unit.

The fat finger trade was for a total of 25,000 lots of Nifty 50. The 14,500 call option contract was in the money (ITM) by Rs.2,128 as Nifty closed the day at 16,628. This resulted in losses of Rs.266 crore. I am sure that is too confusing, so let us break up the deal in a tabular fashion.
 

Details of the Trade

Implication

Option strike sold

14,500 Nifty Call option (02nd June)

Premium received by the seller

Rs.0.15 (15 paisa)

Total lots of Nifty sold at 0.15

25,000 lots

Nifty lot size (market lot)

50 shares per lot

Total units of Nifty involved

12,50,000

Nifty value at closing

16,628 on Nifty

Strike on which call sold

14,500 on Nifty

Loss to seller of ITM call option (a)

2,128 (loss on call selling)

Total call option units sold (b)

12.50 lakhs

Total loss (a x b)

Rs.266 crore

 

In the above case, the seller has got the premium of Rs0.15 but that would hardly make a big difference to his eventual loss. The above amount of Rs.266 crore is the loss to the seller of the call option and a profit to the buyer of the call option. For now the exchange has decided to treat it as a genuine trade rather than annulling the trade but more details are awaited.

Of course, there are some bigger questions that beg an answer. There are supposed to be checks and balances at multiple levels. Firstly, did the seller have that much margins and were limits not breached? Secondly, the broker is supposed to have limits on orders and double checks to prevent such fat finger trades.

Thirdly, what about exchange filters? It is not clear why these did not get triggered. Apparently, even as another fat finger trade disrupts the system, many questions remain unanswered.

About the Author

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Disclaimer

Investment/Trading in securities Market is subject to market risk, past performance is not a guarantee of future performance. The risk of loss in trading and investment in Securities markets including Equites and Derivatives can be substantial.

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