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‘Fat-finger’ mistake risks are rife at brokerages

Aug 03,2018
Local brokerages lack internal safety mechanism that might protect them from the kind of “fat-finger” accounting mistake made at Samsung Securities in April.

According to the Financial Supervisory Service (FSS) on Thursday, brokerage firms didn’t have internal systems to warn them about large stock orders that exceed a company’s actual market capitalization. Additionally, many brokers are able to make stock transactions without confirmation from their superiors.

The FSS said it investigated 32 brokerages between May 9 and June 1 after the infamous Samsung Securities fat-finger mistake disrupted the stock market.

On April 6, a clerical employee of Samsung Securities made an inputting error. Instead of sending 2,018 other employees of the company 1,000 won ($0.89) in dividends for the shares they held in their employer company, he or she sent them 1,000 shares for every share they owned.

That so-called fat-finger error - an industry term for an inputting error - resulted in the distribution of 2.8 billion “ghost” shares. In reality, there are only 89 million Samsung Securities shares.

One of the biggest problems found by the FSS was that the brokerages don’t have a mechanism to warn them about very large stock orders.

The Korea Financial Investment Association propose an alert system that would be activated when stock orders are between 3 billion won and 6 billion won or 1 to 3 percent of a company’s shares are placed through the direct market access (DMA) trading platform. When an order exceeds 6 billion won or more than 3 percent of the company’s shares, the order should be suspended.

The DMA is an electronic trading platform at brokerages that allows institutional investors to place buy or sell orders directly on the exchange rather than through stock brokers. It is widely used in high-frequency trades because of its speedy execution and low costs. However, it is also known to be vulnerable to mistakes that could lead to massive losses.

The FSS also found that in block deals, transactions between institutional investors in which the two parties agree on a price for shares to be bought or sold, brokerage employees were able to simply input figures without the approval of their superiors.

It was possible to place orders that exceeded the total amount of stock in the company, as in the Samsung Securities case.

The FSS also found that, on screens, the boxes in which a broker inputs the value of a stock being ordered or the volume weren’t distinct, which could result in confusion.

“Unfortunately almost none of the brokerages passed the internal stock transaction safety system,” said Kang Jeon, head of the FSS financial investment examination department. “Some were as inadequate as Samsung Securities.”

The FSS said it is encouraging brokerages to improve their electronic systems, including setting an alarm system, making the value and volume boxes more distinctive and install a system where the brokerage on its own could suspend an order that exceeds 5 percent of a company’s issued stock.

The FSS proposed brokerages create a system that would require additional approval by a senior employee for block deals that exceed a certain amount.

BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]