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 MARKET REPORTS |
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Resident Trader
Making typos when inputting trades can cost you big time
Will Kraa, January 16, 2008
Yesterday evening I did a routine scan through the charts of stocks that I can trade at 10% or less margin with one of my CFD accounts. I noticed that Harvey Norman had over recent weeks sustained a considerable drop in price in line with the overall market. As the chart shows it reached a high of $7.20 and then, since mid December, dropped by about 15%. It fell to a previous level of support at $5.95 and this held except for a brief period of a few minutes of panic on Monday (14 January) shown by the long tail on the second last candle.
It is likely on that day that there were a number of stop orders at $5.95 or just below since that would be logical place for traders to place a stop. While HVN is a reasonably liquid stock, it does not trade in huge numbers and it is not hard at times for someone to give the market a little nudge down to collect cheap sell orders. I am not saying that what happened was done on purpose, just that it was possible.
On Monday the market for HVN opened at 10:04:41 am at $6.09 and after that immediately started to drop. By 10:07:01 it had fallen to $5.95 then to $5.94 followed by a couple of sales of 1000 shares at $5.90 and then the cascade started all the way down to $5.75 within about 20 seconds and then about a minute later it was back to $5.90. During that time there were over 80,000 shares traded below $5.90.
For anyone nimble enough to collect these panic orders there was an immediate profit available. It would have been possible to buy well over 10,000 at $5.75 and many more at slightly higher prices and sell them within a few minutes at 10 to 15 cents profit and with minimal risk if you understood what was happening. Unfortunately there were also those whose stock was sold at very low prices and there must have been some very disappointed people at the end of the day.
Considering all this the stop at $5.95 was still valid and I decided there was a potential trade here. HVN is in a long term up trend and similar retracements in price have usually been followed by a good rally. This morning the news was that Australian stocks were expected to open higher after the US market rallied on Monday and so I decided to place a long trade in HVN with a stop at $5.95. When I place these stops I monitor them myself to avoid these panic sales described above.
The opening auction showed a match price of $6.05 so I placed an order in the pre-opening queue at $6.06. I was prepared to risk $1300 for this trade and with the opening likely to be at $6.05 the risk per share was 10 cents and so I would be able to buy 13,000 HVN. That was the size of the order I placed and at the same time I had an Order Status window open showing this trade and ready to amend it if necessary.
Almost at the exact time that HVN was about to open my screen went blank momentarily and when it came back the market in HVN was trading and had opened at $6.06. My trade had not been done and so while the screen was blank some more orders for $6.05 were placed moving the match price to $6.06 and my order was stranded with the surplus orders. I decided to amend the order to change the quantity and the price, typed in the figures, and clicked OK. Immediately my order was done but not at the price I expected but at an average price of $6.1624.
The market quickly rose to $6.20 but then started to go the other way and soon I was looking at a loss greater than the risk I had been prepared to take as the price moved down to my stop price of $5.95 but before I could do anything quickly moved up again.
It was time to find out what I had done wrong and the very helpful CFD provider soon enlightened me by looking at its records. What I had done wrong was just a very simple typing mistake. While the market is moving quickly the temptation is to hit the OK button too quickly before reading carefully what you are about to OK! What I had done while amending my order was to type in an extra 0 in the wrong place. My order finished up being for 11,000 HVN at $60.10!
Basically this was now an At Market order and fortunately did not get filled at a price that was too ridiculous. It was bad enough though and has most likely destroyed any chance of getting a reasonable reward for the risk taken in this short term trade. As the CFD provider pointed out to me, it could have been worse. Just imagine an extra zero in the volume part of the order. Now that would have been real fun!
Of course with an order for some 110,000 HVN in the physical market it is unlikely I would have a spare $600,000 plus in cash sitting in an account but with CFDs and using margin it would have needed only some $60,000 or so and that might have been possible, though not on this occasion. So in a way that sort of mistake would have been better since it could not have gone into the market.
The lesson to learn from this is that, even when the market is moving fast, it is necessary to read any order tickets very carefully before placing them. It is better to miss out on a trade rather than to place an incorrect order.
The rest of the day the market traded without direction. Sometimes it was up, sometimes slightly down but later in the afternoon it went down some 25 points with HVN following the market down. I placed my stop order at $5.95 and was partly filled when some large orders were placed at lower prices, eventually driving the price down to $5.87. I did not chase prices down but left my sell order as it was.
The price did rally and at times got close to my sell order. I decided to wait for the closing auction which usually does not reflect the panic selling that may appear at other times. Instead of the smaller orders seen during the day this time brings out the large orders and I noticed there were orders there as large as 100,000. At first the match price was $5.90, the price around which it had been selling for some time but then some very large sell orders appeared and the match price at which it closed was $5.87, the same as the low for the day.
By that time I had amended my order to $5.85 to make sure I could take part in the closing auction to sell the rest of the shares. The net effect was that my shares sold for an average price of $5.881 for a loss in the trade of $3095. Its quite possible that tomorrow I might get a better price to get out but it is a risk I am not willing to take. Some of the very large sell orders disappeared just before the time to close the auction.
At the moment it seems the Australian market follows the USA market whenever it goes down and goes down anyway when the USA market goes up.
A very small typing mistake cost me substantially more than I was willing to risk on this trade. In retrospect the best I could have done was to sell out of the trade the moment I realized it was wrong. At that stage I could have sold at a small profit rather than a large loss. That is not just because I now know that the trade lost me money, but because even at the start I should have taken into account the fact that the risk taken by the higher price was too large. The appropriate thing to do in that sort of circumstance is to take immediate action by getting out of the trade even if it meant a small loss.
The alternative would have been to reduce the size of the trade by selling half of it. That would have reduced my exposure to the $1300 I was prepared to risk intially and even though I would not have been able to get out at the price I wanted to, the loss would not have been much only slightly more than the $1300 and half of the loss I had in this case.
The lessons to learn:
Check every order ticket carefully before committing to the trade, even if the market is moving quickly.
If a mistake is made get out of the trade immediately or reduce the exposure as necessary when the mistake means too much risk is taken.
A stop (even if placed in the market) does not guarantee an exit at the price intended. Sudden adverse spikes in the market will get you out at much lower prices. Market maker providers will take some time to get you out even if you have a stop in the market. During that time the market can move against you by a significant amount. They may benefit by getting you out at a lower price. Believe me, it has happened to me.
More articles from this edition of CompareShares:
Stocks: Uranium stock picks for 2008
Investing: Stocks to hold in turbulent times
Resident Trader: Making typos when inputting trades can cost you big time
CFDs: How do margin calls work on CFD trading?
Analysis: The Recession we don't have to have
Smart Investing: Taxation of super savings upon death
US: Citigroup has $10b loss, US markets dive
Commodities: China coal shortage to continue
Whatever your views, you can discuss this article - or any of Will's articles - on our message board Your 2 Cents.
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