trading errors happen
Trading errors–buying when you mean to sell, or buying/selling much larger amounts than you intend–happen. Not often, but they do. (For completeness sake, I could have included buying/selling much smaller amounts of stock than you mean to, but that’s not painful to fix.) Their possibility is the main reason your broker records all the buy and sell instructions he receives.
discovering an error
In my experience, discovering a trading error comes almost immediately on having made it. So potential damage done before you find out is less an issue than figuring how to trade back out of the error you’ve made.
professionals have more safeguards
Professional investors have safeguards that individuals don’t. In the US, SEC-regulated managers always employ in-house traders as intermediaries between the portfolio manager and broker. (The idea is to prevent brokers from bribing portfolio managers. Of course, the measure doesn’t prevent wrongdoing, just shifts its focus.) Entering an order that’s 100x normal size will certainly elicit a confirming phone call from the trading room.
Trading in foreign securities is a particular sore spot. It’s easy to lose a decimal point when the local currency isn’t something you’ve dealt with since childhood. I’ve also had foreign brokers observe to me that some clients insist on demonstrating their language “skills” by delivering orders in the local tongue–only to botch the numbers badly. This is a particular problem for Westerners in Japanese, where the number 10,000 is “ichi man” = one ten thousand and not “ju sen” = ten one thousands. All the Asian brokers I knew had a policy of confirming all orders in English.
what to do
I made a trading error the other day–my first in over twenty years.
As I’ve mentioned in other posts, I own two Japanese social networking stocks, DeNA and Gree. I have what’s for me a large position in DeNA, a company I’ve followed for years. I only began to pay attention to Gree recently, when the company made a complaint to the Japanese Fair Trade Commission that DeNA was pressuring third-party mobile game developers not to offer their output to Gree. To me, that means Gree is a serious rival, so I bought a small amount while I started to research it.
A couple of weeks ago I decided to double my position size.
I use Fidelity’s online international stock service. It’s very inexpensive, fast and easy to use. There’s a slight, but noticeable, lag between the prices Fidelity shows and the real-time quotes in the local markets, but I’ve never found that a problem.
I entered the number of shares I wanted, clicked the “trade” button, and clicked again to confirm the order (which was now denominated in yen).
The order was filled almost instantly. But when I looked on my positions page, I had bought 10x what I wanted. (I’m not sure how this happened. My best guess is the following: as you enter an order online, a drop-down box appears beneath the number of shares box in the order form. It contains possible order sizes for the number you’re in the midst of typing. The possibilities include 10x the amount you’ve already entered. Somehow, I must have scrolled down to the larger amount.)
…actually, worse than “Whoops!”. Suddenly not only did I have a huge position in Gree, but the Japanese social networking tail of my portfolio was now humongous enough to wag the entire portfolio dog.
I had two choices. I could either enter a sell order immediately for the entire extra amount and take whatever price the market would give me. Or I could try to trade out of the position over a period of time, hopefully at higher prices.
One of my first bosses used to say that a situation like this is a choice between fast death and slow death (she was a rather pessimistic person), and fast death is always preferable. I think that’s true, that the second alternative is a form of denial and will lead to no good. But I’d frame the issue a bit differently. I’d say instead that Murphy’s Law is in force with this trade: if you sell right away, the stock will go up as soon as you’re done; if you hold on, the stock will plunge. –Actually, as I write this, I realize my thoughts are the same as my old boss’s, only prettied up a little.
So I sold 90% of the extra stock. I gained about a yen a share on the sale, which came close to covering commissions, but I lost about 1.5% of the principal on currency conversion. And, of course, Gree went up by about 15% in the following week. …oh, well.
The main points, though, if you make a trade error, are:
–consider the risk you’ve introduced to your portfolio as a whole. If it’s unacceptably large–meaning, say, you would be tempted to hide bad results from your spouse–reverse the trade immediately.
–consider that your judgment at the moment is suspect–after all, you created the mess you’re in–so err on the side of caution.
–act according to behavioral rules that have worked for you in the past, assuming you have enough investing experience to know what your tendencies are.
–the most conservative course of action is to reverse the unwanted trade at once.