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Computer Glitch Causes Havoc and Losses on Nasdaq
goombah99 writes "In an illustration of how fragile the electronic stock market system is the NY Times is reporting how a tiny computer glitch rippled through the Stock Markets with buyers who bought low and sold high taking huge losses. An erroneous large sell order was entered. Many people bought at this low price, then signed options contracts to sell these at higher prices, locking in a profit. Or so they thought utill the erroneous low sell order was removed. Now to honor their options they had to buy the stock at a higher price. Since exchanges trust each other's trade prices it rippled throughout the system. There does not seem to be any way to gracefully undo such errors."
What if some smart but malicious programmer rigged the system for his own profit? I know this example here is a glitch, but perhaps in the future...
I wonder how many people got fired because of it.
H.
I bet we can make the two of them poor, while making the two of us rich.
wud
I wonder how a Virus Attack (Specially Crafted) on Wall STreet would play out.. Could be interesting.
(Or,maybe they run Norton SystemWorks... )
// instant - "I for one welcome our new Decaff Coffee-Flavoured-Coffee Overlords"
In a Tom Clancy book (Debt of Honor, I think), a computer programmer takes advantage of a weakness in the stock market to induce a crash. After a week of the market shut down, they recover by resetting the prices to where they were the day before the glitch and instructing stock brokers on steps to avoid re-creating the crash.
It doesn't apply to this situation, but the specifics of how they do it is interesting for anyone who might want to check out the book.
... that the glitch caused SCOX to fall even more :)
start stocking up on toilet paper and gold coins!
I like microcars
Remeber being a kid and playing some game (like baseball or soccer)? What happened when someone really screwed up? or did something thinking they were allowed? You called "do over!!!"
That is the solution. On Monday morning, all of the trading managers go out on the floor, and start off the day by yelling "do over!!!" Every trader's account is reset to its pre-Friday state, and everyone is happy. Duh, it's so simple.
Wonder if this is yet another argument to open sourcing critical projects so many more people can watch and debug it. I know, I know -- lots of vulns found on OSS lately, but I'd still rather trust systems where I can see the code if I needed to do so.
While I'm at it, how many SCO stocks did it manage to fsck up?
Lisa: Wow, Dad, you're surfing like a pro!
Homer: Oh, yeah! I'm betting on Jai-alai in the Cayman Islands, I invested in
something called "News Corp"--
Lisa: Dad, that's Fox!
Homer: [shrieks] Undo! Undo! [hits key, sighs]
$cat
and while the SEC and others do their best to proteect traders, mistakes do happen. This is part of the random process of the markets, and must be accounted for when making a trade, even on options markets.
If you lost money, sorry. Unless the SEC/others can prove that somebody is liable for the initial mistaken order, you lose. Tough. Trading is risky, and sometimes the risks are completely unforseen.
Support a few technologists in Washington.
This reminds me of a nugget.
The stock market is frail, and a fool's playpen. I remember hearing a story about a huge media barron, before the stock market crash that led to the great depression. The mogul was standing in this elevator and overheard busboys talking about how they were going to start playing the stocks. The millionaire immediately sold everything when he got to the office. His reasoning was that if two people who had no money were playing stocks, that they were a sign that the whole system was at fault and doomed. I forget who this person was, so if anyone remembers... hehe feel free to say.
The guy's logic is correct even to this day, imho. The big companies that go public hope that an infusion of cash will make them more profitable, but it usually ends up that they get to take a break on stockholder's money for a while until it's deadline time again and they have to scramble to make product/service X work.
The whole system is wrong.
Look at all the ads for investing these days. They all suggest that you trust them to make you money, and they have as selling points, how easy it is to make money. The easier it is, the more moot it is, imho.
There is no easier way than hard work.
Glitches are bound to happen. Remember when the grid went down this past summer? I would have suspected major losses then, but somehow it wasn't that bad?
I work for a firm that writes software for options traders and clearing firms. Sometimes system glitches do happen (or more often than not, a user error, like entering in the wrong price). However, when this happens and a trade occurs, it sticks unless both parties agree to bust the trade.
The fact that the trades were cancelled without permission from everybody involved in the trades is quite disturbing (because then it can set up precedence that any of your trades could be cancelled without you knowing about it, and that can really screw up your position).
Some people lose money because of mistakes, and some people make money because of mistakes...that's part of how the market works, and you should be willing to accept that risk if you're going to trade.
If it really was that bad (and a $20 difference is huge), and archipellago did screw up, they should take responsiblity and take the losses. If someone just entered in the wrong ask price, then that firm should take the responsibility. I know if our systems screw up our traders, then we mitigate those losses.
I have a feeling there might be some lawsuits in the near future if there were a lot of shares traded.
From the FA:
Some exchange officials, speaking on condition of anonymity, said they had little sympathy for traders who bought stock at the low prices, and then lost money when they sold the stock before learning that the earlier trade was being canceled. "They should have known that was too good to be true," one said.
Damn! Gotta check my Linux box for back doors, addware, or some other bug. I should have known it was too good to be true!
Don't waste your vote! Vote for whoever you want, unless you live in a swing state it won't matter anyways
My first thought when reading the summary above was that this would be an easy problem if managed by a central, relational database system.
Simply "roll back" the transaction that failed, and the dependencies would cancel themselves out. But, then I realized that the current RDBMS model only allows for a single transaction - you can't nest them.
Also, transactions are private only - you cannot transact with data in the middle of another transaction.
Thus, you might have ACID compliance, but only with one level of "undo".
How hard would it be to create an RDBMS that supports infinite levels of "undo" or transaction/rollback.
Such that you commit transaction A, which affects rows 1,2,3, and 11. Then, another transaction B which affects (further) rows 2, 3, and 12.
Then, if you roll back transaction A, transaction B would be similarly affected. I dunno - the depencies may get rediculous - but it seems that this could and should be done at some point.
Bright idea? Or another noise from an unpleasant orifice?
Let me know what you think!
I have no problem with your religion until you decide it's reason to deprive others of the truth.
Think about it: people who bought and sold the erroneously priced stock can undo their sells and buys. Now the people who bought from those first generation buyers must be allowed to undo also. In the second generation a new problem arrises: these people have no reason to undo nor do they have done anything wrong - you bought a car, paid $1000 instead of $10000 because the clerk at the store made a mistake and sold me the car for $5000: why should be forced to give you the car back when the store come to collect the rest of its money?. Now interact a little more - the future market works at a very fast pace, hundreds, thousands of trades may happen in a minute. Somewhere down the line things may get really messy, bith logistically and legally.
"There does not seem to be any way to gracefully undo such errors"
They wouldn't have to be gracefully undone, if there was a simple check to gracefully prevent them from being made.
W3 R Gr8Trades. All U base R belong to us. Nyaaaaa.
(Anyone entrusting a company named "Gr8Trades" to buy 5000 shares at $40/share should be spanked. $200,000 was theirs, now it's not.)
sigs, as if you care.
I think the people left holding the bag here are exactly the right ones: The ones who thought they were gonna make instant big profits.
Not only did think they had bought something something at far below its value, they then signed options contracts to sell what they had just bought at slightly below its regular price. They should have known something was fishy... why would anybody want to pay close to the normal price to them if the price had just plumeted? Why would anybody want to sell to them at far below the usual price?
The should have known that the rules of the game allowed for their trade to be undone, yet they committed to an options contract that couldn't be undone because if they had hesitated, they risked their "instant profits" going away... their fault.
/. write up:
There does not seem to be any way to gracefully undo such errors.
From the article:
Such losses would have been prevented if the markets had not resumed trading until a decision was made on which trades, if any, should be canceled. But with markets intensely competitive, trading resumed before officials had made their decisions. The losers were traders who were not responsible for the errors or the slow decision making.
But I guess hindsight is 20-20, right?
given enough damage, it is not impossible for Nasdaq to consider voiding every deal since the glitch started...
How can I have confidence in a stock market where trades can be suddenly reversed if someone cries, "but it was a mistake!" That's like my buying a car and while driving out of the lot someone jumps in front of me and demands an extra $5,000 because they made a mistake. Sorry, I've got my receipt, the car is mine buddy.
It was unusual to see the spread between buy and sell markets be more than a few cents. And with the software that let you see the position on NASDAQ and all the other order books simultaneously, that spread was getting even smaller.
So I find it puzzling that traders wouldn't realize something was amiss with a $20 spread on a stock. I'm sure they did realize it was amiss, and there was a strong possibility that NASDAQ would break the trade, but they figured they'd go ahead with the trade just in case they could make some money before it was broken. It was, they lost money, and now they're crying.
BTW: Somebody asked what NASDAQ's software runs on. Mostly they use Suns, although there are some Windows systems, and possibly some SGIs.
The next Cmdr Taco duplicate will be ready soon, but subscribers can beat the rush and see it early!
Graceful way to undo? Of course not. However, it's not to say that a financial market could not operate with these types of glitches anticipated in the system. For example, there could be introduced explicit insurance against the risk of such infrastructure failures. Notably, large players -- typically making the most sweeping "hedging" buys of the kind described here -- would not buy such an insurance product. Instead, they would self-insure, adopting internal practices that would factor in the risk of infrastructure failure, and spread the risk across all its operations. In other words, in the absence of explicit insurance, it's just another example of games that only large institutions should play. In fact, it is often neither advisable nor desirable to make markets "safe" for small players. It's just too expensive, in terms of additional overhead and lost market efficiencies.
Pffft...Screw that! Start making a list of people who are stocking up on toilet paper and gold coins. This is anarchy baby!
The system actually seemed to have worked pretty well except for the actions of th Archipelago market. There's no way to prevent errant data from making its way to the financial markets, so the question is what are you gonna do about it once it gets there?
What's supposed to happen is that everyone is supposed to stop trade in the stock while market officials try to sort out what happened. The NASDAQ did just that, and called the company involved to see if they had any news that would have justified the drop and they responded that there was no news. NASDAQ announced that their initial review indicated that there was errant trading going on, reserved the right to cancel the trades made before the halt, and released the stop. Within the hour, they confirmed the source of the problem, and revesed the errant trades.
Yet, while trading was still halted on NASDAQ, Archipelago undid their halt without any announcement that anything was wrong. This is wrong on two levels... not only did it falsely convince other people that the drop was for real, but it also pressured NASDAQ's decision-makers to hurry up, otherwise NASDAQ would lose trading volume to Archipelago.
So, the blame for this mess really belongs at Archipelago... they seem to have done an investigation that resulted in a verdict of no error, where in 20/20 hindsight we know there was an error on the play. Did Archipelago conduct a flawed investigation, or did they conduct any investigation at all? This was a case of the market's self-policing rules falling apart rather than any computer program...
Nobody knew it was a bug at the time. They simply saw the price dropping dramatically and decided to take a risk and bet on a price rebound. It was only after the halt and after the resume and *after* these people sold what they though they had bought that NASDAQ decided to cancel the orders.
Daytraders often buy on dips, betting that the stock is being oversold. This is a decent strategy, since often the reaction to bad news is more extreme than the news warrants. So, the stock dips suddenly, then regains a lot of what it lost. This is risky, because sometimes it turns out that news was even worse than initially reported, and the stock goes down even more. Daytraders understand this risk and accept it.
However, NASDAQ has introduced an entirely unprecedented risk -- that your buy order may be cancelled with no notice after you have already sold it forcing you into a short position that you did not intend.
Take this scenario:
10:55 AM - Investor sees huge dip in stock, enters BUY order for 1000 shares
10:56 AM - Investor gets confirmation from broker that he bought 1000 shares at $40, total price $40,000 (plus fees)
10:58 AM - Stock is halted
11:19 AM - Stock resumes trading, price starts going back up
11:55 AM - Investor puts in SELL order for 1000 shares
11:56 AM - Investor gets confirmation from broker that he sold his 1000 shares at $50, paying $50,000 (minus fees). That's a profit of $10,000.
12:28 PM - NASDAQ announces cancellation of all trades between 10:46 and 10:58 AM.
12:30 PM - Broker adjusts Investor's account to remove cancelled BUY order from 10:55 AM. But the SELL order was not in the cancelled time frame. Investor now has -1000 shares of stock and must buy to cover the debt.
12:35 PM - Investor enters BUY order to cover the 11:30 SELL.
12:36 PM - Investor gets confirmation from broker of BUY at $55 per share, total cost $55,000. Since the shares were sold at $50/share, that's a loss of $5000, due to NASDAQ's cancelling after the fact.
If NASDAQ had announced it was cancelling transactions before resuming the stock, the investor would not have entered the SELL order in the first place, and the whole thing would have been a wash. That would be the fair way to handle it.
He got a tip from a shoeshine boy and figured that the last players were in the game and the market could only go down. He got out and preserved his fortune through the crash of 29.
There is no better ROI than genius.
:P
You could be like the guys who invented ICQ.
Or you could create a business, that slowly churns in the coin.
Or you could make a movie like Blair Witch, using about $5 of pocket change and some cigarettes, a scrap of tent and some gasoline, and make way more money than you'd ever make measuring stocks. Just don't make a sequel.
Stocks are mere gambling, imho. The house always wins...
I, for one, welcome our new pulp fiction overlords
MLT - simple and robust open source multimedia framework for Linux
accordinging to the article it's not entirely clear what happened.
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"There was some sort of system glitch," said Andrew Goldman, executive vice president of Instinet Group. "We are trying to figure out precisely what it was and who caused it. It appears that the result was an unintended effect on the stock in question."
Other market officials said that the sell order apparently went into an electronic loop, endlessly repeating. Then automatic systems sprayed those orders throughout the market.
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As reported early, the "new" it is a compendium of "experts" each with little to no responsibility for the system as a whole.
Any those may get fired surely will NOT be the responsible parties.
Who's responsible? The people that allow sub-standard organizational theories to hold sway. The people who focused on minimizing expenses over insuring appropriate accuracy.
In short, every manager and technologist in the place, except for those already unemployed because they argued against the policy.
On Oct 2 2002, someone at a brokerage firm Bear Stearns entered a 4 million dollar trade as a 4 billion dollar trade and it wasn't doublechecked and caused most market indices do go down about a half percent DURING NORMAL TRADING HOURS during the last hour of trading.
& cp 1=1
This was widely reported in the financial press, and eventually the sell position was unwound.
Since the order was a sell order tied to a diversified holding, it caused this decline to happen with both the electronic Nasdaq exchange and also the auction-based NYSE.
"In October of last year, for example, a trader at Bear Stearns mistakenly entered an order to sell $4 billion in stocks instead of $4 million. And two years ago London's stock market collapsed after one hapless trader entered an extra zero into a sell order."
See
http://stacks.msnbc.com/news/945909.asp?0sl=-21
and
http://news.bbc.co.uk/1/hi/business/2294525.stm
for more details
Previous errors
Mistakes have been made in market trading before by other companies.
In May last year, London's FTSE 100 index dropped by more than 2%, after a trader typed 300m, instead of 30m, while selling a parcel of shares.
In 1998 a Salomon Brothers trader mistakenly sold 850m-worth of French government bonds by LEANING ON HIS KEYBOARD.
And at the end of 2001, shares in Exodus, a bankrupt internet firm, jumped by 59,000% when a trader accidentally bid $100 for its shares, at a time when its value was 17 cents.
Game: Player 'Donald J Trump' now has AI skill level 'experimental'.
He saw an ad for really cheap DVDs at some discount web site. So he ordered a bunch of copies and then sold them on eBay. Only problem is he didn't wait until the DVDs actually arrived before he sold them, and it turned out they were out of stock, and the order was cancelled. So he had to buy the DVDs at a higher price somewhere else in order to fulfill his eBay sales. Oops.
Clancy was a bit simplistic there - it would be a hell of a rollback.
You don't seem to understand...
A better analogy is that you sold the orange for 20c, then after someone was locked into buying it, because they have already sold it to someone else, you tell them that the orange is only available for $1, because the orange you originally offered did not exist.
I'm gonna need a spec.
I wrote the front end to an options management system for a commodities market a few years ago. market managers could drag the volatility graph as they saw fit (with the real trades superimposed).
:)
it was a quiet market mainly because only about 3 people really knew how to deal these things so most traders venturing in there would be fleeced.
anyhow, as the terminal would reside on the trading floor i thought some security would be in order. the user had to log in to the system (validated against the network credentials) then after 2 mins of nothing happing, it would log out.
the annoyed the trading floor staff and i was instructed to remove it, despite vigerous protesting (or should i say, a stream of explitives from me). lo and behold within 2 weeks there was an investigation - in a quiet period a trader had gone in and rigged the end of day prices (to make his book look better).
this taught the management a lesson. this also taught me some things
#1 dont underestimate human lazyness
#2 dont understimate the stupidity of managment that is 'customer focused'
now i look at this it has bugger all to do with the topic, but really ive wanted to get this off my chest for like 7 years
...is for buyers and sellers to all SLOW DOWN and pay attention to long term performance rather than minute-by-minute numbers which aren't real meaningful statistics anyway. Frankly anything outside the offical quarterly reports is speculation anyway! Simply allowing only 1 trade per 24 hour period per stock would fix many, many issues with the market right now. The "day traders" should be restricted to playing "numbers" with Magic:TG cards and Ty Beanie Babies....rather than mucking with our financial backbone.
Here's the problem with your timeline. At 11:19 AM, trading didn't restart at NASDAQ. It restarted at Archipelago. When trading re-started as NASDAQ, there was a simultanious warning that it was likely the pre-stoppage trades would be reversed.
Sure, there was out of line behavior, but it happened at Archipelago... who is a completely different operation. The moral of the story is to trust NASDAQ for a fairly played market, and beware of Archipelago opening trading too soon on stocks that should remain halted.
According to the posts on elitetrader.com:
h readid=25431
"A guy in my office said it was a trader at Bear. He was supposed to send a market order for 9,000....accidentally sent it for 9,000,000."
Apparently an erroneous sell order (offer) was placed for 9M shares at $42. About 2M shares executed before the remainder of the order was canceled.
Read the real-time reaction of traders here:
http://www.elitetrader.com/vb/showthread.php?s=&t
Everyone realizes the offer is out of line. Some declare "free money!" and purchase as many as they can, then sell at $47, $52, $55, etc. None seem to realize that trades will be busted (canceled) until it's officially announced.
If that corporation noticed it had accidentally overcharged the customer, there is no way in hell it would notify the customer and say "Here's your money back! Sorry!".
The corporations go out of their way to fool and trick people into things; there's no fucking way you should let them off the hook when they fuck up in your favor.
Maybe if we had a more rational economic system where the corporations didn't exist solely to fleece people out of their money, your solution would be allowable, but there's no way in hell anyone should give an american corporation the benefit of the doubt. They wouldn't think twice about raping you up the ass when given the chance.
Anyone that's done some control theory knows how to solve the problem --- just add some hysteresis into the feedback loop, ie. response delay in both directions.
:-)
All forms of instability are reduced in their effect by this means, so it doesn't matter whether the instability stems from human error, bugs, or system glitches arising from other things.
And exactly how would one do this? There's a ton of ways, and quite a few of them simply entail holding quoted prices steady for a mandated period, plus a few adornments.
There are much more creative ones around though which could probably work even better, like allowing only audio readouts in trading rooms so that info comes in slowly like in tickertape days, or the one I like best, allowing traders to use no equipment other than the morning's financial newspaper, plus a pen and notepad.
"The question of whether machines can think is no more interesting than [] whether submarines can swim" - Dijkstra
--You have to give them some props:
> The price plunged, falling from $57.50 at 10:46 a.m. to a low of $39.25 at 10:54 a.m. Mr. Goldman said that Gr8Trade officials noticed the trading and notified Nasdaq of a possible problem. A Nasdaq official, who declined to be quoted by name, said Nasdaq contacted the company and was told there was no news to explain the move. It halted trading at 10:58 a.m.
--Twelve-minute response time. That's better than I would ever have thought! Could have been a lot worse.
.
== WolfriderV6 == I'm willing to admit that *I just might* be wrong... Are you??
1) Anybody who bought at those low prices knew something was
either a) very wrong or b) very bad news was out. This was
after all a $60 stock and they were now buying at $42.
Without going into detail, I find it impossible they lost
any money on options trades (no open exchange, prices were
much higher when they did reopen).
2) Similar things have happend at CBOT and CME on their
electronic stock index products a few times this past year.
Most recently, a trader was said to have entered a stop/loss
order in the less liquid Dow Jones futures for a very large
amount. As CBOT handles S/L orders natively (internally),
their system proceded to hit bids until the order was
filled. Those trading S&P futuers did notice what was going
on and started selling there as well, perhaps fearing a
terrorist or other news related item. The sell off was not
as far (500 Dow pts), in part because of the greater market
depth, and the fact nobody could figure out what was going
on. Trades were subsequently broken, hours later, on the
CBOT, but NONE were cancelled on the CME. This caused quite
a bit of pain for people who had s/l orders open which were
executed, for all intents erroneously. (no not me, but I do
know one who was). CME refused to cancel as the original
event did not occur in house.
To this day, I do not believe the order was entered in
error. I believe a hedge fund or other firm had a need to
buy, and buy large. What better way to get filled then to
trigger a large move in a closely correlated market (Dow
futures) where you know the majority of the trades will be
cancelled, and just sit on the bid in the other market
(CME) as people panic sell. And do not rule out collusion.
I caught the various news reports on CNBC on friday evening... apparently NASDAQ is only allowed to halt a stock when they are under investigation for regulation violations. When NASDAQ froze it, they also asked the west coast & overseas markets to halt trading on the ticker, but there was no precedent for this; NASDAQ just broke procedure. The interviewees seemed really pissed.
From the article, it appears that the software that communicated market orders went into a loop, and submitted a loop of Sell orders on this one stock. If it were just little old me selling stocks I don't own, it's called a Short, and I'd be liable for buying back any shares I don't own. If its really a computer error, then its up to the market providers to cancel the orders.
At some point, the SEC needs to find out who was liable this this little adventure. Why does NASDAQ allow companies to submit raw sell commands w/out proofing them for validity? And what about this software company? If it were me playing with Ameritrade, and their software repeats my order 100 times, shouldn't the software company be liable for all of the (unsolicited) trades? If these trades should have been cancelled, why did some markets resume trading before they validated the orders? I wouldn't be surprised if there's another round of market rules that fall out of this, because obviously there's a big loophole here.
Cancelling trades, even real errors, is the worst policy for NASDAQ. Here's why:
#1 It destroys faith in the markets. A lot of the people who bought stock to provide liquidity had their buys cancelled, but not their sales. Therefore they lost money. This is a rare, but not the first time, this has happened. All those liquidity providers will be a little slower to stabilize the markets in the future because of the risk someone comes and cancels their trades later. Than means when you go to sell your 1000 shares of SCOX when the market is down and SCOX is down more, but you need the money to buy your house, that bid you are counting on might not be there, or it might be a lower price that it would otherwise be. And this happens thousands of times compared to the occasional "real" error, so the cost of this "what if my trade gets cancelled worrying" is very high and very real.
#2 Negates personal (and corporate) responsibility by the people who caused the problem (which turned out to be a problem for a lot of people, not just them). People should think a bit before they hook up hundreds of millions of dollars to an automated machine, especially one that does things like "sell if I'm down 5%." Then they should think again. And if they handle that much money, we should be able to rely that they are sophisticated entities that should absorb their own errors. If not, someone needs to take their computers away and give them back their Nintendos to play with instead.
#3 Nasdaq only cancelled orders executed through certain systems under their direct purview, not all trades done during that time regardless of system. Half a solution really is worse than none at all. Pretending the rest of the market doesn't exist (it's not part of us, so it's not our problem) is not a high quality solution.
If you want serious reliability, it is possible. You have to think, and you have to be willing to pay for it, one way or another, if it's really that important.
I tried to find a good link to Jay Forrester's Reliability of Components article but the only thing I could find was the IEEE which wanted me to buy it (again--I can't find it). If anyone knows of a valid link, or has the pdf, please respond or email me.
--
Financial systems are the heart of capitalism. Therefore, they are extremely efficient. There are a ton of resources that go into it, and there is a ton of money that they make. Even in poor countries, the financial systems are very good.
Sivaram Velauthapillai
Sivaram Velauthapillai
Seeking the meaning of life... @slashdot of all places
When you use the result of an order execution before its settlement, you are borrowing from your broker. The SEC allows this because the vast majority of settlements are completed as expected, so it doesn't destabilize the market, and it keeps money from being tied up. But even this generosity has limits: if you buy a stock, sell it the same day, then buy it again the same day**, the SEC considers you to be engaged in "pattern day trading" and makes you capitalize your account just like you were an option trader.
**Subject to some exceptions that don't apply to the average individual investor.
No sale occurred. They should be held accountable for breaching the settlement contract. Exactly what that means depends on the fine details of the contracts and of contract law, of which I have little knowledge. All transactions for unseen goods entail a degree of risk and blind faith. The wise trader learns the laws governing such trades, learns how common and likely the various failure modes are, and acts accordingly. I refer you to the Bloomberg Financial Glossary definition of settlement risk: "The risk that one party will deliver and the counterparty will not be able to pay and vice versa." Competent traders are well aware of this risk.To put it more bluntly, when you buy a bill of goods up the river, you owe yourself to verify the situation before you sell to somebody who likes breaking kneecaps.
Even the most honest and careful make mistakes. If every mistake entailed unlimited risk as a matter of policy, only the kings of finance and complete idiots would trade. That would not be an improvement.-- ;-)
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