Invalid Orders
No matter how sophisticated the technology in the stock market, without competent personnel to manage it, it can still be subjected to mistakes. If a mistake is made while ordering in the stock market, it can result in the placement of an invalid order.
An “invalid order” occurs when the order is not executed because it lacks adequate information to make a decision because of a lack of valid data or incomplete process. For example, if a trader places an order on a stock, but does not specify the purchase price or quantity, this would be considered an invalid order.
Invalid orders can result from human error or system malfunction. An inexperienced trader may make a mistake in placing an order or the system may enter the wrong quantity or price. The most common invalid orders occur when the trader has pressed the enter key before entering all of the essential data.
When a broker-dealer receives an invalid order, it must make sure that the order complies with all rules, regulations, and laws before it can be accepted. If it fails in this step, the broker-dealer can be found liable for any losses incurred.
A broker-dealer must also ensure that the order is a legitimate trade. If it is not legitimate, the broker-dealer may be held responsible for any losses. This includes orders that are considered to be “wash trades” and orders that violate insider trading regulations. A wash trade occurs when a trader buys and sells a security at the same price and quantity, resulting in a net gain of zero.
Invalid orders can cause financial loss and investor confidence to drop. Investors often experience market losses if their orders are not executed at the correct price. As market confidence drops and investors withdraw funds, stock prices can fall and the market can enter into a bear market.
If an invalid order is executed, it should be immediately reversed and requeued for execution. All parties involved in the order should be informed about the issue and the cancellation should be confirmed. All information about the order should be logged and the stock should be put up for sale.
To ensure that invalid orders are not accepted, broker-dealers must have suitable procedures in place. This can include setting parameters for the entry of orders, educating traders on the risks of invalid orders, employing qualified personnel to monitor markets, and regularly reviewing trading practices. If a broker-dealer receives an invalid order, it should be properly processed in order to protect investors and the integrity of the stock market.