Error Trades in Futures Markets

Abstract

The impact of news, events or volatility on the underlying market microstructure has been studied extensively in finance literature. Common to many of these studies is the arrival of news. In this paper we use unique data on error trades that have occurred on the CBOT and CME and assess their impact on the underlying market microstructure. Critically, our research can be discerned from other research in that an error trade is, by definition, an event that was triggered by accident and is not news. As such, an evaluation of false stemming from human errors is unique. We find that despite the fact that participants are informed well after the event has occurred that the news turned out to be noise, market efficiency prevails in the sense that trading activity drives market prices back toward their pre error levels long before the exchange announces to the traders that an error has occurred. In line with the market microstructure (volatility) literature we also find that the composition of traders changes around the error event and some types of traders limit their trading. We also show that the types of orders placed by traders changes (more market orders relative to limit orders). While the increased dominance of electronic trading over the open-outcry form of trading has called regulatory attention to error trading policies, we identify no area of concern regarding these policies from a price discovery standpoint. Further, we find that market microstructure reactions to human errors seem to be similar to those found when true is released.