Error account

Trading mistakes happen — a dealer keys in the wrong client code, or a genuine slip puts a trade where it should not be. The exchange lets a broker fix this through a dedicated error account, but only in one direction: the mistaken trade must be taken out of the market again, never quietly reassigned to a different client.

The workbook sets this out as part of the rules on client code modification:

• Client code modification is allowed only for non-institutional trades, and only to rectify a genuine error in entering the client code when the order was placed or modified.
• The exchange conducts special inspections of trading members to check that code modifications genuinely follow the exchange's objective criteria, rather than being used to reassign trades after the fact.
• Shifting a trade to the broker's error account is not treated as a client code modification at all — provided the trades sitting in the error account are subsequently liquidated in the market, and are not later shifted onward to some other client's code.
• Brokers must disclose to the stock exchanges which of their account codes are classified as "error accounts."
• Each broker must have a well-documented error policy, approved by its own management.
• Exchanges periodically review the trades flowing into brokers' error accounts.
• Where a genuine client code modification (not routed through the error account) does occur, the exchange levies a penalty, credited to its Investor Protection Fund — though the exchange may waive the penalty if the broker produces evidence to the exchange's satisfaction that the error was genuine.
• Proprietary trades cannot be modified into client trades, or client trades into proprietary trades, under any of this.

A dealer at a brokerage intends to key in a sell order of 50 lots of 91-Day T-Bill futures for Client X, but mistypes the client code and the order books against Client Y instead.

Because this is a genuine keying error, the trade is moved into the broker's disclosed error account rather than being reassigned directly from Y's code to X's code. From the error account, the broker liquidates the position in the market — buying back the 50 lots — closing out the mistaken trade entirely, rather than simply moving it to Client X's code.

If, instead, the broker had tried to directly re-code the trade from Client Y to Client X after execution, the exchange's special inspection process could flag it as an improper client code modification, potentially attracting a penalty credited to the Investor Protection Fund — unless the broker can satisfy the exchange the modification was for a genuine error and have the penalty waived.

Chapter 6 (Trading Mechanism in Exchange Traded IRD), section 6.3.4 (Trade execution), covers client code modification and the error account rule together, immediately after explaining how trades are confirmed to brokers and clients. Expect a question on what distinguishes a proper use of the error account from an improper client code modification.

• Moving a trade to the error account is not a client code modification — it is a separate, disclosed mechanism, provided the position is liquidated in the market afterwards.
• The one thing that is never permitted is moving an error-account trade onward to a different client's code. That defeats the entire purpose of the control.
• Client code modification itself is restricted to non-institutional trades, and only to fix a genuine entry error.
• Penalties for improper modification go to the Investor Protection Fund, and can be waived only on evidence of a genuine error, to the exchange's satisfaction.
• A broker must have a documented, management-approved error policy — this is not left to informal practice.