Headoftrading: Fat Fingers…How Big Is The Problem? Early Detection Of Mismatched Trades Is Key To Managing Risk And Maximizing Profits On The P&L Desk

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Fat finger mistakes, AKA mismatched trades, cost global banks, brokers, financial institutions and independent advisors millions of dollars in losses on the P&L desk. It’s a problem too big to ignore, so let’s take a closer look at what happens on a fast moving trading floor where mismatched trades are a common challenge.

The error happens when, for example, a trade booked for $10m is tallied against the actual trade (completed on the phone or by chat) which is booked at $100m. Although this mismatch is not detected until reconciliation, the real damage does not occur at this time. Yes the chance for immediate remedial action is lost, but in a fast moving market, the real problem lies in the time it takes for the mismatch to be unravelled after it has been identified.

Let’s continue with the above scenario where a broker thinks a sale has been made for $100m but the trader thinks the buying volume was $10m. Let’s say this happens on day X and that three days later (trade date +3) the clerk in the trader’s Back Office spots the anomaly, calls the broker’s Back Office and both parties agree there is a mismatch. The next step will be for both parties to try to find all the communications relating to the trade that will show where the mistake was made. This can take around a week (trade date+3+7). Once all the information is found, it can then typically take another five days to unravel all the steps of the trade in order to identify if the mistake was made by the broker or by the trader.

So the whole process of sorting out the mismatched trade can take from day trade date +3+7+5 = 15 days. And here’s the rub – in 15 days, fast moving markets can change dramatically and this is where millions of dollars can be lost, because the correct trade must be booked at the trading price. In addition, not only is the bank or firm that made the mistake liable to make a loss, there is an impact on their trading book. Undoubtedly, mismatched trades cause a ripple effect that goes way beyond the original trade that didn’t match up.

Simon Richards, CEO USA, Fonetic

Simon Richards, CEO USA, Fonetic

To mitigate and manage the risk associated with fat finger/mismatched trades, Fonetic enables Front, Middle and Back offices to fully analyse all communications – including voice – that reveal trading behaviours and can deliver early detection alerts within 15 minutes, long before market movement drives greater losses, enabling swift remedial action.

Fonetic’s technology provides a holistic view of all trade related data generated by Front office trading floors as well as from the Middle and Back office functions. It automatically and comprehensively collects, identifies and collates this trading data and correctly matches it to its corresponding communications including text, email, IM, Social Media and, most importantly because most deals are closed over the phone, voice.

This accurate reconstruction of a complete trade, as an entire sequence of events along a timeline, in minutes, is unique to Fonetic and is known as automatic trade reconstruction (or ATR). Also unique to Fonetic is its ability to analyse the context of voice content so that accurate meanings are established right from the start of the data gathering process.

Fonetic brings together many different elements including social media, data analytics, sentiment analysis and unstructured data in order to create a single multi-channel, multi-language solution that can decode trader behaviour. Its solution goes beyond who’s talking to whom and how often. It builds up a detailed relational picture over time that allows the analysis of all the types of communications put together as well as the people involved and that is when context anomalies, such as fat finger mismatched trades, show up and can be caught early on.

 

From: Headoftrading