Large Trade Error and a Customer Request for the Extra Shares
An institutional order to buy 5,000 shares of HLT at market is keyed as 50,000 shares and fills at an average price of $42.10. Twelve minutes later the error is caught; HLT is trading at $43.60. The customer's allocation is corrected to 5,000 shares, and the desk's error account holds 45,000 shares with an unrealized gain of $67,500. The customer's portfolio manager calls and says, "Just give us the extra 45,000 at your cost - we can use it." The firm's written error policy requires COO reporting for any error with a market value impact over $25,000 and prohibits allocating error profits to customers.
1. May the firm transfer the extra 45,000 shares to the customer at cost?
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No. The customer ordered 5,000 shares. Transferring 45,000 shares at the $42.10 cost would hand the customer a $67,500 windfall and violate the firm's written policy against allocating error profits. It would also raise books-and-records, compensation, and supervision concerns. If the customer wants more shares, it should enter a new order at the current market price with a proper order ticket.
2. What must the desk do with the error position and reporting?
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The 45,000 shares belong in the error account, not the customer's account. Because the market value impact exceeds the $25,000 policy threshold, the desk must report the error to the COO, liquidate or resolve the position promptly under the firm's error policy, and document the root cause and remediation. The customer's confirmation should reflect only the 5,000-share order.
3. If the portfolio manager insists the firm "executed" 50,000 shares, how should operations respond?
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Operations should explain that the order ticket and customer instruction were for 5,000 shares and that the additional 45,000 was a firm error. The firm should not alter the confirmation to match the erroneous execution. If the customer disputes the correction, the matter should be escalated to compliance and legal rather than resolved informally by the desk. Any accommodation beyond the customer's actual order requires written approval and cannot involve giving away the error gain.