A reported in a recent blog posting by the Securities Litigation & Consulting Group, (“The Recent Market Turmoil Spells Trouble for ‘Auto-Liquidators’ like Interactive Brokers”), brokerage firms that require their clients to agree to the automatic liquidation of positions when their accounts are in a margin deficit face renewed questions after the wild stock-market gyrations in August and September exposed severe cracks that some critics had warned about for months.
It is estimated that recent sharp market drops may have caused hundreds of accounts at auto-liquidating firms to be severely damaged by faulty algorithms – the computerized programs that select which securities will be sold and the timing of those sales. As noted in the blog posting, “poorly designed algorithms can execute trades that have no hope of efficiently alleviating a margin deficit and actually can convert a curable margin deficit into a death spiral liquidation.”
The accounts that would appear to be most at risk for this issue are those which hold thinly traded stocks and certain stock index options.
“Auto-liquidation algorithms fail when they liquidate thinly traded positions with large bid ask spreads. The margin deficit is calculated based in part on values at or inside the bid ask spread. If the liquidating trades are executed at prices equal to the prices used to value the portfolio the customers’ equity remains the same, the margin requirement is lowered and the deficiency is reduced. Poorly designed algorithms may execute trades at or above the ‘bid’ when closing a short position and at or below the ‘ask’ when closing a long position. When this happens, the customer’s equity is reduced by the liquidating trades which may worsen rather than improve the margin deficiency. Some of these accounts will be converted from an equity position to a debit position in milliseconds because of the faulty algorithm without any change in the value of the portfolio holdings.
If you are an individual or institutional investor who has any concerns about positions in your account having been automatically liquidated in the past few months, please contact us for a no-cost and no-obligation evaluation of your specific facts and circumstances. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA).