Monthly Archives: September 2015

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, such as Interactive Brokers, 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).

LPL Financial Holdings Inc. will pay more than $3.4 million to settle two separate regulatory probes into how the brokerage sold certain complex investment products.

In one instance, the Boston-based firm must pay $2 million to settle allegations by the Massachusetts Attorney General’s Office and the Delaware Justice Department stating LPL failed to supervise its financial advisers who caused clients to hold ETFs for extended periods. Leveraged ETFs are typically designed to deliver a multiple of an index’s performance each day, but results over longer periods can be far different from what the daily objective might suggest.

According to LPL spokesman, “LPL will make enhancements to its oversight of leveraged ETFs including implementation of a renewed training and monitoring program to ensure the proper and effective use of leveraged ETFs as part of investors’ overall financial plans”.

The other instance, is with the North American Securities Administrators Association, which represents state securities regulators, LPL must pay civil penalties of $1.425 million for lapses regarding the firm’s sale of nontraded real-estate investment trusts.

, including the Financial Regulatory Authority and Securities Exchange Commission, for inadequate disclosure of risks and their high fees, which typically range from 12% to 15% at the time of sale.

LPL is the leading securities firm serving so-called independent investment representatives, who typically own their own local business and sell securities as a financial investor of a separate securities firm. In 2014, the firm spent $36.3 million to settle regulatory charges. These regulatory charges have weighed financially on LPL. They continue to resolve remaining compliance issues, resulting from a period of rapid growth.

As reported by The Wall Street Journal on September 14, 2015, (“The Problem With ETFs”), one of Wall Street’s most popular products –Exchange Traded Funds – faces renewed questions after the wild stock-market gyrations in August exposed cracks that many critics had warned about for months.

Investors have poured hundreds of billions of dollars into ETFs over the past decade, drawn by low fees and the prospect of being able to buy or sell a mutual-fund-like product whenever they want like a stock.

But, according to the article, trading records and conversations with investors show that ETFs couldn’t keep that promise when the Dow Jones Industrial Average dropped more than 1,000 points, in the first minutes of trading on Aug. 24, as “steep share-price declines triggered a slew of trading halts that started in individual stocks and cascaded into ETFs. Dozens of ETFs traded at sharp discounts to the sum of their holdings, worsening losses for many fund holders who sold during the panic. The strange moves highlighted concerns raised by academics and others over the years that ETFs might not be as easy to move in and out of as advertised in times of stress. For investors of all sizes, the problems set off alarms that a core component of their portfolios might not always function as expected.”

This recent market volatility has once again placed a spotlight on the “growing concern about how bond ETFs, a popular niche, will perform if investors rush to the exits, as some predict might happen when U.S. interest rates rise” – what some observers refer to as “a recipe for a breakdown” that could be significant and prolonged.

If you are an individual or institutional investor who has any concerns about ETF investments having been recommended for purchase in either your retirement or non-retirement accounts, 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).