What is a fat finger trade and why is it affecting Samsung Securities shares?

A ‘fat finger trade’ is parlance within the trading community for a mistake – a trade that gets executed when the trader did not mean for it to happen. The phrase stems from the risk of pushing the wrong button and sending of a trade that could be many times larger than you intended.

Samsung Securities, which is one of Korea’s biggest brokers, is currently reeling from a scandal that involved just this: someone within Samsung Securities was trying to pay its employees dividends on their shares at a rate of 1000 won per share, or slightly less than $1. They made the mistake of instead paying each employee 1000 shares EACH in Samsung Securities. This amounted to 2.83 billion shares, or more than 112 trillion won – this was something like 13 times the market value of Samsung Securities.

How was that possible?

Well exactly. Nobody seems to be sure at the moment. But more importantly, employees of Samsung Securities immediately took their windfall and sold their shares on the Korean stock market. The media in Korea is calling this ‘ghost stock’ because in reality, the shares do not represent equity in Samsung Securities. Only 16 Samsung Securities personnel sold the shares, but it was enough to send Samsung Securities shares down 12% this week.

So what next for Samsung Securities?

This could be big trouble for Samsung Securities because the error has led many of its clients to lose faith, including some big investors like Korean pension funds. The Korean government has said it may remove Samsung Securities from its list of primary bond dealers (brokers who are assigned to sell government debt into the market). The Korean financial regulator has already launched an investigation into the brokerage. Its chief executive has said that investors will be compensated for their losses. But it has also created a wider controversy around the practice of naked shorting, and has sparked off a petition to the government in Korea to ban naked shorting.

What is naked shorting?

Naked shorting is a process whereby you sell stock you don’t actually own, hoping to then buy it back later at a lower price. Hedge funds, for example, can borrow stock from investors like pension funds, sell it in the market, and then buy it back later, having made a profit. In the case of Samsung Securities, employees sold stock they were not technically entitled to. CFD traders can short stocks without borrowing them because they are only trading the price, and don’t actually own the shares.

So what next?

Expect a major investigation into not only Samsung Securities but also other brokerages in Korea. The financial regulator will want to make sure that this cannot happen again, and internal controls at brokers will be scrutinised. Samsung has said that retail investors who held Samsung Securities stock prior to 9.35 am local time on 6 April will be compensated.

I hold shares in Samsung Electronics – should I be compensated?

Sadly no, Samsung Electronics is a separate company. Korea has a long history of large conglomerates, called chaebol, which were able to diversify into a range of different industries and sectors, launching spin-off enterprises as well. Just because they share the name does not make them the same stock. Samsung Securities is a dedicated financial brokerage and is not involved in manufacturing mobile phones or televisions.

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13th April 2018
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