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I Risked Disaster, Beat Murphy's Law Yesterday

January 14, 2014 | About:

Don’t do what I did on Monday.

One of the dreaded things a stock broker has to deal with is an erroneously entered into trade. That could mean mistakenly clicking on SELL instead of BUY, a "fat finger" quantity that wasn’t requested, a bad (incorrect) ticker symbol or a host of other problems.

When I joined Merrill Lynch in 1987 we had to write up physical order tickets and turn them in to a wire operator. She proof read them and sometimes caught errors before they happened. That "second look" disappeared when desktop computers allowed for order entry directly by financial professionals.

The process was much faster, but the "need for speed" made for the occasional "bad order." Customers cannot be expected to accept orders that they didn’t ask for. When a mistakenly placed trade goes awry any financial damage is charged to the offending broker. With large transactions that can get pretty expensive.

Brokerage company rules say these trades should be "busted" or canceled out immediately to avoid the risk of adverse market action. Small losses can sometimes turn really ugly in a hurry. Despite knowing the rules, many brokers rolled the dice, holding on to the inadvertent position, while hoping for a favorable outcome rather than personally eating a sure loss.

If the unwanted trade became profitable the pro could close it out while giving the profits to his client. Customers don’t renege on gains that have already been made. The broker would get credit for making his client money and would not have to report his mistake to anybody.

Stocks fluctuate. Why not wait a few minutes to see if the position can be closed without incident? Think Murphy’s Law… “If it can go wrong, it will.”

I watched a Merrill Lynch colleague lose his career over an error that went horribly wrong. The problem occurred on a large-sized trade, on a Friday afternoon, just before 4 p.m. He decided to let it go until Monday when he’d have a chance to see a rebound and a "no harm, no foul" result.

Unfortunately, the next trading day was Oct. 19, 1987. That day the DJIA fell by 508 points or 22.6%, a single-day record that still stands. I really missed seeing my friend Charlie around the office.

************************************************************************

Today I was planning to sell four covered calls on Oracle (ORCL) shares held in my IRA account. After setting up the trade entry, I failed to change the account number away from my non-retirement account. Oops. The trade went through instantly leaving me with a naked call position I didn’t want. After first putting in the correct trade for my IRA I needed to close out the unwanted short position.

I knew I should just cover for a small loss but the urge to get even is very strong. The market was tumbling so I placed a buy-to-close limit order three cents below where I sold. Why? TradeStation charges $1 per contract (one-penny a share) commission on options. That 3-cent difference covered my costs plus $1 per contract.

It was a stupid play, but one that that worked out favorably a few minutes later. The next time I might not be so lucky.

Knowing the right thing to do and actually doing it are two different things. Your honor, I plead guilty, while smiling nonetheless about my ridiculous four-dollar profit.

By the way, since 1987 the price of the Wall Street Journal has quadrupled to $2 an issue. The single-copy price of the New York Times has surged  by 733% (from 30 cents to $2.50). Somebody should tell the BLS, the keepers of the CPI, which claims that inflation has virtually disappeared. 

About the author:

Dr. Paul Price
http://www.RealMoneyPro.com
http://www.TalkMarkets.com

Visit Dr. Paul Price's Website


Rating: 4.6/5 (9 votes)

Voters:

Comments

grox01
Grox01 - 7 months ago

I saw the movie "The wolf of Wall street", it seems many brokers lost their job that 19th october 1987 :)

AlbertaSunwapta
AlbertaSunwapta - 7 months ago

A trader/coworker used to forward to me the most dramatic fat-finger Bloomberg GIPs and some of the moves were pretty astounding. The frequency was also surprising. A lot of simply digit transpositions likely go unnoticed due to their placement and low ball bids not being set low enough.

For retail traders, having only used two systems, I'd guess that many trading platforms generally do clients a great disservice in terms of providing only minimal error checking and entry confirmation. It would be great if AAII or some body would review web sites with thisin mind.

Earl.Nancy
Earl.Nancy - 7 months ago

Dr Price,

My hat is off to you. You demonstrated to me, a dedicated student, that even YOU can make a mistake. My take-away from your article is ALWAYS double check my order. I will. Thank you!

Houston...we have a problem!

BoeingBeauty

LwC
LwC - 7 months ago

"Somebody should tell the BLS, the keepers of the CPI, which claims that inflation has virtually disappeared."

Actually, the BLS has responded to assertions such as yours, but my guess is that you ignore it since it doesn't serve your political agenda.

Addressing misconceptions about the Consumer Price Index

A number of longstanding myths regarding the Consumer Price Index and its methods of construction continue to circulate; this article attempts to address some of the misconceptions, with an eye toward increasing public understanding of this key economic indicator

http://www.bls.gov/opub/mlr/2008/08/art1full.pdf

batbeer2
Batbeer2 premium member - 7 months ago

Thanks for the article.

A thought.....

Anyone who would prefer to live in 1987 and not 2014 because everything was cheaper back then, is either too young to remember those days or just plain nuts. 

>> TradeStation charges $1 per contract (one-penny a share) commission on options. That 3-cent difference covered my costs plus $1 per contract.

I rest my case.

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