What Are Freak Trades in Stock Market? | Espresso

Freak Trade in Stock Market

Though there are numerous opportunities present in the stock market, there are also plenty of risks for those who are not familiar with the market trends. While this does not imply experienced traders do not face any risks, it certainly means that new investors and traders should always learn more about the stock market before starting an investment.

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Since the margin for error in the market is already low, the smallest mishaps can have a colossal effect. These phenomena are known as freak trades, which are accidental trades that take place due to a minor error but will have a huge impact on the market movement, stock prices, and general sentiment of the market’s participants.
Also Read: What is Margin Money in Stock Market?

What are Freak Trades?

If you know what a freak accident is, it won’t be difficult to understand what a freak trade is. A freak trade takes place when the price of a stock or any security hits an unanticipated high or low for a moment and then returns to the former level. But here is what you need to know about freak trades.

First of all, there is no intention behind a freak trade. It may be a perfectly honest mistake that may lead to grave consequences. Secondly, it is very difficult to blame a single entity for a freak trade.

Since there are so many elements in the stock market, no single participant can be responsible for the same. However, many seasoned traders and investors who have studied and known the market for years have seen instances of manipulation that have led to freak trades.
Know More: How to Invest In Share Market?

What Causes Freak trades?

When a broker or trader is handling a huge stock order, it is quite possible that they may punch in one wrong digit, which can make a huge difference to the entire order. Of course, these typographical errors are genuine mistakes, but these errors can cause a freak trade. In the stock market, this concept is nicknamed “fat fingers” and may take place when a trader is executing a large order during the busiest market hours.

Freak trades are also the result of technical glitches in the electronic systems at the exchanges. For example, earlier this year in February, a technical glitch at the National Stock Exchange led to the market being shut down. As a result, many traders had sold their positions and were unable to cover the losses to pay for their margins. Yet another glitch at the exchange in September led to a freak trade in the options segment, which was a cause of concern among investors who chose to trade in derivatives, particularly options trading after the peak margin was levied in the cash segment.
Also Read: Options Trading

Many traders and speculators said that these glitches may have resulted from the NSE doing away with the Trade Execution Range (TER) mechanism for risk management. The TER could ensure that market orders were not executed beyond a specified execution range.

How to Protect Your Investments?

Many traders and market experts believe that placing a limit order can help prevent the impact of a freak trade. So, a limit order is essentially a type of order that allows a trader to buy or sell an asset at a certain price or more.

In the case of a buy limit order, the order will be executed at the specified limit price or below, while for the sell orders, the order will be executed at the limit price or a higher price, which helps traders protect their trades with better control on the prices. That way, the trader need not risk buying an asset for a high price and selling it low.
Also Read: Stop Loss in Stock Market

Conclusion

There is no single reason or error that leads to freak trades in the stock market. And in some cases, traders and investors are likely to recover their losses since a freak trade occurs for a very short time. However, a limit order can help one hedge their trades against freak trades.

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Frequently Asked Questions

There is no knowing how much money one can make or lose in the stock market. This will depend on the amount of money they have invested so far or their daily trade volume. So, if you want to ensure that you don’t lose a huge amount of money due to freak trades, invest wisely and only use the funds that won’t affect you if lost.

 

Technical glitches occur when the electronic systems at an exchange face issues and the prices cannot be updated. This can lead to freak trades, but sometimes, the problem and the impact may persist beyond a short period of time.

Freak trades are a result of minor errors that can lead to volatile price movements for a very short time in the market. However, the impact of such a sudden change may be serious and cause traders and investors to incur severe losses.