Quick Answer
A clearly erroneous transaction executes at a price so far from the prevailing market that FINRA (or the exchange) can nullify it. Thresholds shrink as price rises for exchange-listed stocks, run wider for OTC equities, and a FINRA officer, not either party, makes the call within tight deadlines.
Now that you understand how firms handle internal trade errors, let's look at what happens when a trade executes at a price that is wildly off from the prevailing market. These situations are handled not by the firm, but by the Financial Industry Regulatory Authority (FINRA) or the exchange.
What Makes a Transaction "Clearly Erroneous"?
A clearly erroneous transaction is one where the execution price is substantially away from the prevailing market price at the time of execution. Unlike a trade error (wrong order entry by a rep), this involves a trade that actually executed on the market at a price far removed from where the stock was trading.
Think of it this way: A stock is trading at $50, but due to a technical glitch or human error, a trade executes at $5. That is clearly erroneous; it should never have happened at that price.
How Are Exchange-Listed Securities Reviewed?
For securities listed on an exchange, FINRA uses the reference price (typically the last sale price before the erroneous transaction) to determine whether a trade qualifies as clearly erroneous. This review is limited to eligible off-exchange transactions: the percentage table below applies to qualifying non-LULD (Limit Up-Limit Down) transactions, and different conditions apply to LULD securities.
Numerical Thresholds
| Reference Price | Normal Trading Hours | Outside Normal Trading Hours |
|---|---|---|
| $0.01 to $25.00 | 10% | 20% |
| $25.01 to $50.00 | 5% | 10% |
| Over $50.00 | 3% | 6% |
- If the execution price deviates from the reference price by more than the applicable threshold, the trade may be declared clearly erroneous
- A FINRA officer reviews the transaction and determines whether to nullify (break) the trade, and ordinarily acts within 30 minutes after learning of the transaction; extraordinary circumstances extend that deadline only to the start of trading on the next day
Who Can Request a Review?
- Either party to the transaction
- A FINRA officer acting on their own initiative
Multi-Stock Events
- A five-to-nineteen-security event lasting five minutes or less uses a 10% threshold
- When 20 or more securities are involved in a clearly erroneous event (such as a market-wide technical failure), FINRA coordinates with the exchanges and nullifies all transactions at prices 30% or more away from the reference price
- Leveraged ETFs and ETNs use the applicable threshold multiplied by the leverage factor
Exam Tip: Gotchas
Notice the inverse relationship: cheaper stocks get wider thresholds (10% for stocks under $25) while expensive stocks get tighter thresholds (3% for stocks over $50). This makes sense because a 3% move on a $100 stock is $3, which is significant. A 3% move on a $2 stock is only 6 cents, which could be normal volatility.
How Are OTC Equity Securities Reviewed?
For OTC (over-the-counter) equity securities that are not listed on an exchange, wider, price-tiered thresholds apply because OTC markets have lower liquidity and wider bid-ask spreads:
| Reference Price | Threshold |
|---|---|
| $0.9999 and below | 20% |
| $1 to $4.9999 | linear range 20% to 10% |
| $5 to $74.9999 | 10% |
| $75 to $199.9999 | linear range 10% to 5% |
| $200 to $499.9999 | 5% |
| $500 to $999.9999 | linear range 5% to 3% |
| $1,000 and above | 3% |
- FINRA acts only in unusual circumstances and normally expects the parties to resolve an OTC trade privately
- If it does act, FINRA must do so no later than the start of trading on the day following the transaction
- A clearly erroneous determination renders the transaction null and void
What Are the Key Procedural Points?
- Requests for review must be filed promptly after the transaction
- FINRA's decision to nullify or let a trade stand is generally final (subject to review by the Uniform Practice Code Committee)
- Parties cannot unilaterally break a trade: only FINRA or the exchange can declare a transaction clearly erroneous
Exam Tip: Gotchas
Know the difference: a trade error (wrong order entry by a rep) is handled internally with a cancel/rebill. A clearly erroneous transaction (execution far from market price) is nullified by FINRA or the exchange. The firm cannot break a clearly erroneous trade on its own - it must go through the regulatory process.
What Should You Check on Exam Day?
- Exchange-listed normal-hours thresholds: 10% at $25 or below, 5% above $25 through $50, 3% above $50. Outside normal hours the thresholds double to 20%, 10%, and 6%.
- A FINRA officer, not either party, decides whether to nullify, and ordinarily acts within 30 minutes of learning of the transaction.
- OTC equities use wider, price-tiered thresholds and a next-business-day deadline; a clearly erroneous determination makes the trade null and void.
- Only FINRA or the exchange can break a trade; a party can request review but cannot unilaterally cancel it.