Exercise caution while placing buy and sell orders

Such mistakes can result in losses; with exchanges putting in place alert mechanisms, the risks have reduced

Have you ever placed an order to buy 100 shares of a company but your broker bought 1,000 shares, instead? Or, clicked the sell button when you wanted to buy? Let us look at what happens in such cases.

If your broker punches the wrong share price or number of shares, he bears the loss. “The broker will call the customer after market hours to confirm the order. If you realise that the order is wrong, point it out. The broker will then check the call (all calls between brokers and clients are recorded). If the mistake was made by the broker, he will take the additional shares on his books and bear the loss,” says Satish Menon, executive director, Geojit Financial Services

In case of a dispute, the client should first register the complaint with the brokerage house. If it is not resolved, he should approach the investors’ grievance cell of the exchange. The next option is to go for arbitration and, lastly, to the high court.

Wrong data entry of the order either incorrect price or number of shares - is common. To deal with such situations brokers take an indemnity policy that protects them. In case of an error, the broker moves the trade into his error account. The insurance company goes through the call records to determine if it was a genuine mistake, in which case it compensates the broker for the loss.

“The problem is when clients carry out the trade on their own and make a mistake. If there is money in their account, the trade will go through even if they erroneously punched in a larger number of shares or a higher price. The only option then is to sell off the extra shares. You may even end up making a profit,’’ says Sandeep Nayak, executive director and chief executive officer, Centrum Wealth Management. The cancellation of an order, once it is executed, can happen only if the exchange agrees to it, and this normally does not happen.

Another error is when the client buys T2T (trade-to-trade) scrips and gives an order to sell the same day, which is not possible. These are shares whose delivery must be taken and they can then be sold off the next day. “Today, thanks to technology, if this happens an alert appears asking the client to pay for the shares and take delivery. So, the broker is able to inform the client accordingly,” says Menon.

Another common error is when a ‘sell’ order is placed instead of ‘buy’. If this happens and the client does not have the stocks to deliver, a penalty called ‘auction penalty’ is charged. If the client has no stock to deliver, the stock exchange will buy the shares from the market through an auction and deliver it on his behalf. The extra price is borne by the client who did not deliver, or the broker, depending on who placed the order.

The auction penalty is calculated at the price at which the stocks were bought. If there are no offers for the stock at that price, the transaction is closed out at a 20 per cent extra price to the last traded price.

In the worst-case scenario, the investor may end up paying 20 per cent more than the last traded price on the day of the auction, where there was nobody tendering shares. If there is a profit it goes to the investor protection fund.

One risk control measure that brokers and exchanges have put in place today is ‘order limit’ on individual terminals, which includes limits on quantity, value, etc. This ensures that an erroneous order does not go through. If an order goes beyond the limit, there will be a request for confirmation before the order gets executed.