With the recent downturns in the stock market, many investors are waking up to find huge losses appearing “automatically” in their accounts. The cause is the now common practice of stockbrokers unilaterally adjusting the margin balance in their customers account by a computer generated process that “auto-liquidates” account assets.
Customers who trade on margin are required to keep a certain total value of assets that are held in their brokerage account. The problem with some of these one-sided transactions is that the customer fails to get true market price when stocks are sold and the customer has no control over the process. Such under-pricing of the customer’s stock sales can then trigger a death spiral in the investor’s account, as more holdings are automatically sold off at insufficient prices and the process continues until large amounts have been wiped out of the account.
It appears that a disastrous round of such auto-liquidations occurred with the downturn of the market on August 24, 2015 and the total amount of the losses are still being tabulated by law firms such as the Florida law firm of Levin Papantonio. According to securities attorney Peter Mougey, “Just recently a company called Interactive Brokers was found liable to a customer for failing to get adequate prices for sales that were made by the auto-liquidation process. The only remedy for the customer is to pursue a claim against their broker.”
One can only speculate at the concern generated within Interactive Brokers by the potential liability to its many customers, but reports show at least one insider recently selling off a significant number of his own shares in the company. In a transaction that took place on Thursday, September 17th, Thomas Frank sold 13,024 shares of his IB stock. As disclosed in a document filed with the Securities & Exchange Commission, the shares were sold at an average price of $39.36, for a total transaction of $512,624.64. He made similar sales totaling almost another $1.5 million in separate transactions on September 4, 9 and 15, 2015.
The holding company formally known as Interactive Brokers Group, Inc. is an automated electronic broker and specializes in routing orders, and executing and processing trades of bonds, securities, futures, and other instruments on more than 100 electronic exchanges around the world. “We may be a long way from seeing the full damage done to its customers through the unfair auto-liquidation process,” Mougey added.