Erroneous Reports, Errors, Cancels, and Rebills

When a registered representative makes a mistake executing an order, the firm must fix it quickly and fairly. Understanding how trade errors are handled is foundational to the rest of this unit.

Trade Errors

A trade error occurs when an order is executed incorrectly. Common examples include:

  • Wrong security - buying stock in Company ABC instead of Company ABX
  • Wrong quantity - executing 500 shares instead of 50
  • Wrong price - entering a limit at $25 instead of $35
  • Wrong account - placing the trade in the wrong customer's account
  • Buy/sell reversal - buying when the customer wanted to sell (or vice versa)

Who Bears the Loss?

The core principle is simple: the customer must not be disadvantaged by any trade error.

  • The firm absorbs the loss from correcting the error, not the customer, and not the representative personally
  • If the error accidentally produces a profit, that profit belongs to the firm (not the rep), unless the firm's written policy states otherwise
  • The registered representative and firm are responsible for correcting errors promptly

Exam Tip: Gotchas

If a question describes a rep who mistakenly buys 500 shares instead of 50, the firm bears the loss on the extra 400 shares. The customer gets the 50 shares at the correct price. The rep cannot keep any profit from the error; it belongs to the firm.

Cancels and Rebills

The standard procedure for correcting a trade error involves two steps:

  1. Cancel the original erroneous transaction (removes the incorrect trade)
  2. Rebill the corrected transaction (replaces it with the right trade)

Key Requirements

  • Cancel/rebill must be processed through the firm's operations department (not handled informally by the rep)
  • Requires supervisory approval before processing
  • Both the cancel and the rebill appear on the firm's blotter (daily record of transactions)
  • Both entries are subject to regulatory review

Red Flags

  • Frequent cancels and rebills may trigger supervisory review or regulatory investigation
  • Patterns of cancel/rebill activity can indicate:
    • Unauthorized trading (rep trading without customer permission, then reversing unfavorable trades)
    • Allocation fraud (placing trades, then allocating winners to favored accounts and moving losers elsewhere)

Erroneous Reports (Cboe Rule 5.11)

An erroneous report is different from a trade error. This applies specifically to options exchanges:

  • An erroneous report of an execution does not make the trade void
  • The actual execution price is binding, regardless of what was reported
  • If a floor broker reports an incorrect price to a customer, the actual execution price controls

Think of it this way: The trade itself happened correctly on the exchange floor. The mistake was only in the communication about what price was achieved. The real price governs.

Exam Tip: Gotchas

A common mix-up is trade error vs. erroneous report. A trade error means the wrong execution happened (corrected with cancel/rebill). An erroneous report means the execution was correct, but the reported price was wrong. An erroneous report does NOT void the trade; the actual execution price is binding under Cboe Rule 5.11.