Applying the Concept:  A $340 Million Electronic Mistake                             

On the morning of December 8, 2005 a clerk for Mizuho Securities placed an electronic sell order on the Tokyo Stock Exchange (TSE), something that happens all the time.  But this wasn’t an ordinary transaction.  Instead ordering the sale of one share of J-Com, a small recruiting firm, at a price of ¥610,000 (about $5200), the clerk place an order to sell 610,000 shares at ¥1 apiece.  The order was for 40 times the number of J-Com shares in existence!  Since Mizuho was acting as a broker for a client, and the mistake was theirs, the firm was financially responsible. Failing to cancel the order, Mizuho had to buy J-Com shares at a price that eventually settled at ¥912,000 and then meet their obligation to sell them for ¥1 each. As a result of what came to be known as the “fat finger” incident, the company lost about $340 million.

The reputation of the TSE suffered the most. Taking responsibility, the head of the Exchange resigned two weeks after the incident.  In the meantime, one would expect that the TSE’s electronic systems have been changed either to allow for the retraction of an order after it was placed, or to force a clerk to carefully verify that such an aberrant order is correct.  Even so, we can be sure that people will make mistakes that machines don’t catch. While electronic exchanges bringing more information to more people, allowing broader participation in securities markets, we will never eliminate all the mistakes. People will always have fat fingers.