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Erroneous Trade

Contents

Unveiling the Mystery Behind Erroneous Trades: Causes, Consequences, and Real-World Examples

Exploring Erroneous Trades

An erroneous trade refers to a stock transaction that deviates significantly from the prevailing market price, often due to computer malfunctions or human error. These trades can have far-reaching implications, leading to market disruptions and financial losses.

Understanding the Dynamics

To address erroneous trades, the Securities and Exchange Commission (SEC) introduced rules allowing exchanges to break trades that deviate from the consolidated last sale price by specified percentage amounts. This review process must commence within 30 minutes of the trade, with details such as transaction time, security, and reason for error submitted to the exchange.

Navigating Guidelines

The percentage thresholds for identifying erroneous trades vary based on factors like stock price and trading hours. For instance, stocks priced under $25 must deviate by 10% during regular hours to be considered erroneous, while this threshold doubles during pre-market and after-hours trading.

Implications of Erroneous Trades

In today's automated and interconnected markets, an erroneous trade in one market can trigger a cascade effect, influencing trading activities across multiple exchanges. This can lead to significant disruptions and financial repercussions for investors and markets alike.

Real-World Examples

Historically, erroneous trades have had notable impacts on market indices. For instance, in 2010, an erroneous trade contributed to a nearly 1,000-point drop in the Dow Jones Industrial Average. Similarly, in 2011, erroneous trades during after-hours trading led to the cancellation of trades involving health sector companies.