Reconciliation: knowing what you actually did

Graduate · enrolled learners

This lesson opens with The Samsung Securities ghost shares, 6 April 2018.

What happened

Samsung Securities meant to pay its employee shareholders a cash dividend of about 1,000 won per share, but its system instead issued 1,000 shares per share, creating roughly 2.8 billion phantom shares in the accounts of 2,018 employees, worth on paper about 112 trillion won, more than 30 times the company's market value, shares that did not exist and could not exist. No control caught the impossible issuance: the system produced shares out of nothing, and the error reached employees' accounts as if it were real. Sixteen of them then sold about 5.01 million of these nonexistent shares into the market, one even after the firm's third warning, and the stock fell as much as 11.68 percent that day, erasing about a tenth of the firm's market value, some 330 million dollars; the firm pledged to compensate investors, regulators reviewed its internal controls, and prosecutors indicted eight employees. Nothing was hacked; a unit error, shares where won were intended, created a state that was flatly impossible, and there was no reconciliation and no control that compared what the system had done against what could actually be true, so an impossible action was executed and acted upon before it could be stopped.

The decision point

Reconciliation is the practice of checking what a system actually did against what it intended and against what is even possible, and it is the control that should catch an impossible state, shares that cannot exist, a position that cannot be held, a total that cannot be right, before that state is acted upon in the market. Samsung Securities is the case: a unit error issued 1,000 shares per share instead of 1,000 won, creating about 2.8 billion phantom shares worth more than the company, and because nothing reconciled the issuance against reality, the impossible shares reached accounts and some were sold before the firm could stop it. The lesson is that a trading or settlement system must not only do things but check that what it did is possible and intended, because an error can produce a state that is not merely wrong but impossible, and an impossible state that is not caught will be acted upon as if it were real. Reconciliation is that check: comparing the system's record of what it did against the external reality, the actual share count, the actual cash, the actual positions, and flagging or halting when they cannot be squared. So the discipline is to build reconciliation that continually compares actions against reality and against the bounds of the possible, and to make an unreconcilable result, a state that cannot be true, stop the system rather than flow onward, because Samsung showed that a system which executes without checking whether its output is even possible will hand an impossible state to a market that is perfectly willing to trade it.

Recorded loss

$330,000,000

Orientation and Year One are open: anyone can read them without an account. From Year Two onward the lessons are for enrolled learners, because progress through the later years only means anything if it is tracked against a record.

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