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April 30, 1998

Will Blunders Ever Cease In Wall Street Trading? Technology Helps, But the Devil Is in the Wrong

By Michael L. O'Reilly

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It was 3:50 p.m. EST on Wednesday, and the market was stable. The New York Stock Exchange was set to close in ten minutes. A trader posted a trade of 1,100 shares of United Technologies at 11 3/4. The problem was that the previous trade had been printed at 111 7/8. The trader posting the 1,100-share print had left a digit off his quote.

The erroneous trade caused a five-percent tailspin in the Dow Jones Industrial Average minutes before the closing bell. The error turned a 40-point rise in the Dow into a disastrous 257-point drop.

Sound far-fetched? It shouldn't. Trading errors happen all the time.

The lost digit that Wednesday - July 31, 1996 - created a panic on the floor and nearly set off the NYSE circuit breaker for the first time. But six minutes after it appeared on the tape, Big Board officials had unraveled the error and printed a correction, posting the trade at 111 3/4. The Dow was recalculated, and closed with a 47-point gain.

In the impassioned and imperfect world of Wall Street trading, erroneous trades are an accepted reality. Most traders attribute slipups to miscommunication or human error. But as desks rely more on electronic systems to route and execute orders, trading errors have been reduced dramatically.

"Ten years ago, I would say my desk averaged 15 errors a week," said Paul Chalmers, director of international trading at Canaccord Capital in Vancouver. "Today, traders are more careful, and systems handle orders with less human intervention. My desk is down to maybe two errors a week."

Handling Errors

Dozens of situations can lead to an erroneous trade. Stock symbols assigned incorrectly. Selling shares for a buy order. Assuming order information. Moving too many - or too few - shares.

Generally, trading veterans outgrow youthful recklessness and take care to handle orders more efficiently. Learning from past mistakes is part of that maturing. Richard Holway, director of equity trading at Investment Advisers in Minneapolis, still remembers every detail of his first error. He has handled every order since with greater caution.

"A portfolio manager asked me to buy 12,100 shares of ADP, Automatic Data Processing," Holway recalled. "Even though its referred to as ADP, its stock symbol is AUD. I entered the order as ADP, and wound up buying shares of Allied Products."

After that mistake, Holway began echoing the corporate name and stock symbol to the portfolio manager sending him an order.

When an error has been made and the order executed - like in Holway's mistake - the execution will stand. The desk making the error will take the position as a holding of its own, and will fill the customer order as originally intended. The inadvertent order is never the responsibility of the customer.

Because most desks will absorb a trading error as a holding of its own, many firms establish an account to handle positions obtained through errors.

But not all mistakes turn out to be disasters. Tom Norby, head trader at Black & Co. in Portland, relayed the story of a sloppy trade turning a profit.