This is What The Law Says About Failure to Execute Trades
When you suffer a loss in your investment portfolio, it may often be down to the vagaries of the market. But sometimes, you may suffer a loss because your financial advisor simply failed to execute trade as or when you instructed them to. In such a situation, you may have legal recourse to sue them for failure to execute trades.
Although it is accepted that risk generally comes with the investing environment, and losses are not uncommon. Even when they occur, they can be due to a variety of factors for which no one is at fault. While this risk is acceptable ordinarily, it is unacceptable when your loss was substantially caused by your broker’s failure to follow instructions.
Whether caused by negligence, malice or plain mistake, you have the right to compensation for your loss. You should not have to bear the risk of an uncertain market, and still suffer on top of that, the reality of an uncertain financial advisor. The law allows you seek recourse for your loss.
Having a right to compensation and actually recovering that compensation may be different propositions though. Claims bordering on failure to execute trades can be technical, and often require a fine analysis of securities law and the facts of your case. Also, broker misconduct cases such as these are often handled in securities arbitration before the FINRA. You will need a qualified securities arbitration lawyer with a deep knowledge of FINRA proceedings and the drive to hold your broker accountable.
For a better chance at the positive outcome you require, contact us at Weltz Law. New York securities lawyer, Irwin Weltz, has over 25 years’ experience representing clients in FINRA arbitration proceedings. He will zealously pursue the full amount of damages you are entitled.
The Law on Failure to Execute Trades
Brokers and financial advisors have a duty to act in the best interests of their clients. They are expected to act in good faith and reasonably carry out instructions made by the client.
Although many investors believe the process of placing a trade is instantaneous, in truth, it is much different from that. You may not think about where or how your broker will place your trade but this process may impact the overall outcome (and cost) of the transaction.
What Happens When You Place a Trade
Usually, when you place a trade, you don’t have a direct connection to the securities markets. Rather, once you push the button that finalizes the trade or call your broker with instructions, there will be a choice of markets where your trade may be executed.
In some firms, this process is automatic. But SEC regulations require that the overall process be conducted with due regard to your best interest. So, even where it is automatic, it must be done in good faith. The options that a broker would usually have for executing your trade include the following:
- If your stock is one that trades over the counter (OTC), such as Nasdaq, your broker may take this route. They may send the order to a Nasdaq market maker that will then execute the trade. Understand the it is a usual practice for Nasdaq market makers to pay brokers for what is called “order flow”. This basically means that your broker may be paid for executing your trade over that platform.
- If your stock is listed on an exchange, such as the New York Stock Exchange, your broker may have three options. They may direct the order to the exchange where your stock is listed, another exchange or to a “third market maker”. The third market maker is basically another firm that buys or sells stock listed on an exchange at prices that are publicly quoted. Same as the OTC market, some regional exchanges or market maker firms will offer to pay your broker if they route your trade through them.
- Another option open to your broker is to an electronic communications network. Networks such as this usually match buy and sell orders at specific prices. Your broker would most likely do this if you have a limit order (an order to buy or sell at a specific price).
- The last option is to send your order to a division of the broker’s own firm. When they do so, the order will be filled out of the firm’s own inventory. The firm will basically buy your stock from you, or sell to you. This way, the firm can make money on the difference between selling price and purchase price.
The decision on which of these options to utilize in making your trade may affect the outcome of the transaction. When it comes to making these trades, an investor justifiably expects to be able to trust that their broker will act loyally and competently.
But if the broker fails to justify this trust and make a trade in circumstances that amount to a failure to execute, they will be liable for the loss.
When Does a Failure to Execute Trades Occur?
It can often be difficult to tell when you have suffered a loss because of your broker’s failure to execute trades. This is because, as you have seen, the process of placing a trade can involve many factors. Isolating just what factors were involved in making the trade may be the key to understanding where liability lies.
If the circumstances of the trade involve any of the following factors, you may have a failure to execute claim.
- Placing a trade too slowly: Trade execution usually seems seamless and quick. You place a trade, seal the deal and that’s it. But in truth, prices can change faster than it takes to place a trade. This is why even a little delay can be costly. In fast moving markets especially, by the time your order reaches the market, it may be slightly or very different. While there are no rules that dictate how fast a trade must be made, if your broker advertises their speed to you, they are bound to deliver.
- Negligent trading: Negligence means failing to take care. Perhaps due to the fact that brokers often have to deal with a large amount of orders, they may be overwhelmed. This can especially happen in a fast moving market. But you are entitled to the best possible service. So if your broker negligently failed to place your order or placed the wrong order, they will be liable to you.
- Making a trade for the broker’s or firm’s profit: As mentioned earlier, brokers have a duty to act in your best interests. This means they owe you a fiduciary duty of good faith, loyalty and competence. On no account should they raise their own interests above your own. In fact, if there is a conflict of interest, they should disclose to you. But if your broker has gone ahead to make a trade with more than an eye on their own profit margin, they may be liable if you suffer a loss.
- Failure to make the trade at all: In order circumstances, your broker may differ on whether the trade should be made at all. If they refuse your instructions to trade even after promising to, they will be liable for a failure to trade. The law binds brokers to act by your instructions once they are understood and accepted.
- Placing a trade contrary to instructions: In the same way, if you instruct your broker not to make a trade, they should comply. If you have reason to believe that a trade was conducted contrary to your instructions, they may be liable to you.