Managing trading errors

January 31, 2012 06:00 PM

One of the first decisions a trader needs to make is whether to open a separate error account. While every effort should be made to have check and double-check entries before hitting the trade button, at some point you will have an error. When that happens, just remember the opening words of The Hitchhiker’s Guide to the Galaxy — “Don’t panic.”

As long as there has been trading there have been trading errors. Back in the open outcry days, orders went from the customer to the broker to the order desk to the floor desk to the runner to the executing broker and back again, and errors were common. Once an error was discovered, and if the market was still open, it was the job of the order desk to just get out of the error and then determine fault. Determining fault was usually easy. There were double-checks in the system, composed primarily of duplicate orders and telephone recordings, that would tell the story. If it was determined that the customer, broker-agent or floor broker was at fault, they ate the error. If the error occurred at any other point in the process, the clearing firm swallowed the loss and then played the tapes to see just who wasn’t going to be getting a Christmas bonus that year.

Of course, that is assuming that the error resulted in a loss. Sometimes errors produced winners and the rule of thumb was that whoever was going to eat a loss should reap the unintended benefits of their incompetency. It was my experience, however, that customers seldom reported errors in their favor.

Every person or entity along that chain had to maintain an error account for both practical and legal reasons. But in today’s world of trading where independent traders execute their own order entry, if there is a mistake in your account, it’s probably yours. And if you are just trading for yourself, there are no legal or tax reasons to maintain an error account, so why have one?

Page 1 of 4
About the Author
PJ McCarthy was a floor manager at the CME and an independent trader at the CME and CBOT. He currently is managing partner of The Chicago School of Trading. He can be reached at