Error Account

A trader at Thorne Ridge Securities enters a buy for 5,000 shares when the customer's order was for 500. Operations moves the unwanted 4,500 shares into the firm error account. Which statement describes what that account is for?

1. A.A customer omnibus account in which unmatched positions sit until the affected customer can be identified.Wrong. That describes a suspense or unallocated account used when ownership is unknown, whereas here the firm knows exactly whose mistake it was.
2. B.A firm account that absorbs any position a customer later regrets, so the customer is made whole on the day of the complaint.Wrong. This turns the account into an insurance policy against market movement, which would have the firm underwrite customer losses it did not cause.
3. C.A firm proprietary account holding positions created by the firm's own trading errors until they are resolved, with the resulting profit or loss borne by the firm.Correct. It captures both halves of the idea: the account is the firm's, and the economic consequence of the mistake stays with the firm.
4. D.A segregated customer account, so the position must continue to be reported on the customer's statement until it is unwound.Wrong. Segregation is a custody concept protecting fully paid customer securities and has nothing to do with where a firm books its own mistake.

Why: An error account is one of the firm's own proprietary accounts. Its purpose is to get a position created by the firm's mistake off the customer's records at once and carry it where the responsibility lies, so the market risk between the mistake and its resolution sits with the firm and any gain belongs to the firm as well. Because it is a firm account, nothing held in it appears on a customer statement and no customer has a claim to its contents. If the 4,500 shares had matched what the customer actually ordered there would be no error and no basis for moving anything.

Ellsworth Brokerage maintains an error account. Which position is that account properly used to hold?

1. A.A customer purchase the customer now disavows, held while the representative tries to talk him round.Wrong. A disputed trade stays where it was executed while the dispute is worked out; shifting it converts a customer complaint into an undisclosed firm position.
2. B.Stock bought for the firm's account because a clerk keyed the wrong side of a customer order.Correct. The position exists only because the firm erred, so it belongs in the account whose profit or loss the firm absorbs.
3. C.A block bought in the morning and left unallocated until the day's closing price is known.Wrong. Choosing who receives a position after the price is known is allocation after the fact, and no account label makes that acceptable.
4. D.A proprietary position the desk took deliberately and prefers to keep out of its trading book.Wrong. Deliberate positions belong in the trading account where their risk is measured and supervised; this is not an alternative book.

Why: An error account is the firm's own account, used to receive positions created by the firm's own mistakes — a wrong side, a wrong symbol, a wrong quantity — so that the customer is made whole and the position can be closed out under supervisory review. Whatever gain or loss results falls on the firm, and that is the discipline which keeps the account honest. Its entry condition is that the position arose from an error, so any use whose outcome depends on where the market goes next falls outside it. A position the firm chose to take, or one whose owner is still undecided, does not qualify however it is labelled.

A representative at Calder & Voss entered a customer purchase exactly as the customer instructed. Two days later the stock has fallen and the customer says she never wanted it. The representative asks operations to move the position into the error account and cancel the customer's trade. How should operations respond?

1. A.Process it, because the error account exists precisely to absorb positions that a customer disputes after the fact.Wrong. It reads the account's purpose off the customer's reaction rather than off whether the firm mishandled the order.
2. B.Decline, because the order was executed as instructed and using the error account would shift the customer's market loss onto the firm.Correct. No mishandling occurred, so the only thing the transfer would accomplish is relieving the customer of a loss she owns.
3. C.Process it, provided the representative reimburses the firm for the loss out of his own funds.Wrong. Making the representative pay does not create an error, and a personal payment to relieve a customer's loss is itself an improper sharing arrangement.
4. D.Decline, but re-book the purchase as an as-of trade carrying today's date so the cost basis is refreshed.Wrong. An as-of entry carries an earlier date than the day it is keyed, and rewriting a cost basis to suit a customer falsifies the record either way.

Why: The error account is available only where the firm made a mistake in handling or booking an order. Here the order was executed as given, so there is no error to correct; what has happened is that the customer's position lost money. Moving the shares to the error account would transfer that market loss from the customer to the firm, which is both a misuse of the account and a way of sharing in a customer's losses. If instead the ticket showed a quantity or a side the customer never gave, the error account would be exactly the right destination.

A trader instructs operations at Braycliff Capital to move a customer's losing purchase into the firm's error account and to re-book it to the customer only if the stock recovers. On what ground must operations refuse and escalate?

1. A.The error account may not carry an equity position overnight.Wrong. No such holding limit exists, and inventing one obscures the real defect, which is where the position came from.
2. B.No principal approved the entry, and approval would have made it proper.Wrong. Supervisory sign-off is required for legitimate error entries but cannot authorise one that fails the entry condition to begin with.
3. C.The resulting loss must be charged to the registered representative who took the order.Wrong. That prescribes a remedy nobody is owed and would itself put the representative into the customer's trading result.
4. D.The position arose from no firm error, so the account may not receive it at all.Correct. Ownership would turn on where the price goes next, which is allocation after the fact dressed up as an error correction.

Why: The error account exists to receive positions created by the firm's own mistake, and that origin is its entry condition. Here no mistake occurred: the order was entered as the customer gave it, and what the trader wants is to leave ownership of the position unsettled until the market reveals which outcome is preferable. Making ownership contingent on subsequent price movement is allocation after the fact, and no account, approval or documentation makes it acceptable. Had the trader instead keyed the wrong symbol, the resulting position would belong in the error account and the firm would bear whatever it cost to unwind.