Clearly Erroneous Trades And Trade Busts

Occasionally a fat-fingered order, a broken algorithm, or a liquidity vacuum sends a trade through at a price wildly out of line with the market — a stock trading at $50 suddenly prints at $5 or $500. Exchanges have a formal process to unwind trades like this: the Clearly Erroneous Execution rules, which let an exchange, on its own initiative or on a party's petition, cancel ("bust") a trade that executed too far from the reference price, restoring both sides to where they were before the bad print.

Whether a trade qualifies is decided by numerical bands set relative to the stock's price and volatility — tighter percentage bands for lower-priced, more liquid stocks, wider bands for higher-priced or less liquid ones — rather than by subjective judgment case by case, so market participants can know in advance roughly what will and won't be busted.

Worked example

During a brief liquidity gap, a $40 stock prints a handful of trades at $32 before immediately snapping back to $40. If the applicable erroneous-trade band for that price level is 10%, those $32 prints (a 20% deviation) clearly qualify, and the exchange busts them, canceling the trades and leaving the affected parties as if they'd never happened. A print at $37 (about 7.5% away), inside the band, would stand even though it also looks like a bad fill.

This process is distinct from a trading halt: busting undoes specific bad prints after the fact, while circuit breakers pause trading entirely to prevent them in the first place.