“Freak Trade in Sensex Options: ‘Fat Finger’ Error Costs Trader Rs 78 Lakh”
A fat finger error in Sensex options led to a chaotic premium swing, causing a trader to lose Rs 78 lakh. This incident marks the second major derivatives market freak trade in under a month, shedding light on the impact of algorithmic trading.
In a startling turn of events in the derivatives market, a “fat finger” error during a Sensex call option trade resulted in a wild premium swing and a significant financial loss for a trader. This incident marks the second major freak trade in the derivatives market within less than a month, raising questions about the influence of algorithmic trading on market fluctuations.
The peculiar incident occurred during a Sensex call option trade with a strike price of 67,000 on the option’s expiry day. According to reports circulating on social media platform X, it appears that a trader mistakenly entered a market order to purchase the 67,000 call option, which was initially quoted at a modest premium of approximately Rs 4-5. This inadvertent market order quickly sent the premium skyrocketing to Rs 209 within mere minutes, as it absorbed all the sell orders listed in the system up to that price point.
A market order, as opposed to a limit price order, executes trades at the prevailing market price until the order is entirely filled or all pending orders in the system are matched. This lack of price restriction can result in extreme fluctuations, as seen in this case.
The exact details surrounding this unusual trade remain unclear. It is uncertain whether the trader, known by the X handle “SOAMJENA,” was speculating on the Sensex’s direction or using the option as part of a hedging strategy. SOAMJENA has stated that he suffered a staggering loss of Rs 78 lakh due to this incident and is currently disputing the trade with the brokerage firm.
The loss was exacerbated because the trade included a stop loss mechanism. When the option’s price exceeded a certain threshold, the stop loss was automatically triggered, causing the trader’s software to sell the options at any available price. This rapid selling action led to the option’s price plummeting back to approximately Rs 4.
The crux of the dispute revolves around the type of stop loss order placed. The trader insists he entered a stop loss limit (SL-L) order, which restricts opposing trades to a specific price range. However, the broker asserts that the trader submitted a stop loss market order (SL-M), permitting trades at any price until the order was entirely filled or all pending orders were cleared.
It’s important to note that the National Stock Exchange (NSE) discontinued the use of SL-M orders in 2021.
Market experts believe that this swift and dramatic price swing underscores the power of algorithmic trading. They suggest that rival algorithms may have recognized the large buy order for the 67,000 call options and swiftly flooded the system with higher-priced sell orders, ultimately forcing the trader to buy at inflated prices. Conversely, when the trader sought to exit the position, other algorithms may have preempted the order by selling at lower prices.
Despite the financial losses incurred by some, this incident became an unexpected windfall for a few traders, as illustrated by a tweet from @kapil_thiru, who shared, “I just got free money from SENSEX expiry glitch. I’m happy and also sad that people would have lost money as well.”
This incident marks the second major freak trade in the derivatives market within a month, with the previous occurrence involving Nifty Bank put options of the 45,700 strike on August 11. That event saw premiums drop over 90 percent briefly, with multiple clients reportedly using the same algorithmic strategy to sell put options well below market value.
Sources By Agencies
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