Key Takeaways
- Trade errors must be identified, reported, and corrected promptly.
- Supervisors must review all trade errors to identify patterns.
- Error accounts are used to hold and resolve erroneous trades.
- Customers cannot be disadvantaged by firm errors.
- Documentation of errors and corrective actions is required.
Last updated: January 2026
Trade Error Handling
Trade errors are inevitable in a busy options operation. Proper handling is essential to protect customers and maintain regulatory compliance.
Types of Trade Errors
Common Options Trade Errors
| Error Type | Description |
|---|---|
| Wrong option | Incorrect underlying, strike, or expiration |
| Wrong side | Buy instead of sell or vice versa |
| Wrong quantity | Incorrect number of contracts |
| Wrong account | Trade placed in wrong customer account |
| Wrong price | Limit order entered incorrectly |
| Opening/closing | Incorrect position designation |
Error Identification
How Errors Are Discovered
| Source | Example |
|---|---|
| Real-time alerts | Order entry system flags discrepancy |
| Customer complaint | Customer reports incorrect trade |
| Statement review | Customer notices error on statement |
| Supervisor review | Daily review identifies issue |
| Clearing firm | Position discrepancy reported |
Error Resolution Procedures
Step-by-Step Resolution
| Step | Action |
|---|---|
| 1. Identify | Confirm error occurred and determine nature |
| 2. Notify | Inform supervisor and affected parties |
| 3. Document | Complete error report with all details |
| 4. Correct | Execute correcting trades |
| 5. Allocate | Move trades to proper accounts |
| 6. Review | Supervisor reviews and approves resolution |
Customer Protection Rule
Critical Rule: Customers cannot be disadvantaged by firm errors. If the error benefits the customer, they keep the benefit. If it harms them, the firm absorbs the loss.
Error Account Usage
| Purpose | Procedure |
|---|---|
| Temporary holding | Erroneous trades held pending resolution |
| Correction trades | Offsetting trades to fix errors |
| Aging review | Positions cannot remain indefinitely |
| Supervisor oversight | Regular review of error account activity |
Supervisor Responsibilities
Error Review Requirements
| Requirement | Frequency |
|---|---|
| Individual errors | Review each error when reported |
| Error patterns | Analyze trends monthly |
| Root cause analysis | Investigate recurring errors |
| Training needs | Identify if training is needed |
Documentation Requirements
For each error, document:
| Element | Details |
|---|---|
| What happened | Description of the error |
| Who was involved | Representative, customer, supervisor |
| When discovered | Date and time |
| How corrected | Actions taken to resolve |
| Financial impact | Gain or loss to firm/customer |
| Preventive measures | Steps to prevent recurrence |
Error Reporting
Internal Reporting
| Report | Recipient |
|---|---|
| Error log | Branch manager, compliance |
| Significant errors | Senior management |
| Pattern analysis | Compliance department |
Regulatory Reporting
Some errors may require regulatory reporting:
- Material customer harm
- Systemic issues
- Violations of rules
Test Your Knowledge
If a trade error benefits the customer, what is the appropriate action?
A
B
C
D
Test Your Knowledge
Trade error accounts should be reviewed by supervisors:
A
B
C
D