Investors caught on the wrong side of trades in last week's market freefall may have to live with their losses.
Rules to slow trading on the New York Stock Exchange last Thursday drove orders to all-electronic exchanges that do not have such curbs.
The stock markets' plunge briefly wiped 998.5 points from the Dow Jones industrial average and drove shares of such presumably sound companies as Accenture and Boston Beer down to just pennies.
While Nasdaq and others canceled trades on more than 200 largely NYSE-listed companies whose shares fell or rose more than 60 percent, experts said investors unlucky enough to have sold depressed shares of other companies that fell less — including Procter & Gamble — have little recourse.
"You might feel bad for people who sell at the bottom," said Jill Fisch, a professor at the University of Pennsylvania School of Law. "That's part of being in the market."
Firms that manage exchange-traded funds said they have received numerous complaints from investors about the 60 percent trigger to cancel trades. More than two-thirds of securities affected by Thursday's gyrations were ETFs.
Some investors may have trouble recovering if they directed brokers to place "market" orders, which go through at whatever price the market is at, rather than "limit" orders, which allow only certain trades. For these investors, it may be a case of buyer — or seller — beware.
"I suspect lawyers will circle around the situation, and the idea that trade cancellations cannot be appealed will get thoroughly tested in the courts," said James Angel, a finance professor at Georgetown University's business school.
"You may have a negligence case against your broker for mishandling your order," he said. "But if you put in a market order and it happened to be filled at the wrong time, such as at a penny, you're stuck."
The U.S. Securities and Exchange Commission, the Financial Industry Regulatory Authority and six exchanges on Monday settled on a preliminary framework to curb trading as markets plunge and to better handle erroneous trades.
Yet Thursday's breakdown also highlights how much the market has changed since the crash of Oct. 19, 1987, when stocks fell more than 22 percent.
At that time, human beings handled most trades and matched buyers and sellers. Now, much of the process is automated.
And because of automation, investors may not know who is on the other side of their trades.
"I'm not sure there is any recourse — certainly not right now, because no one seems to know what the problem was," said Roberta Karmel, a professor at Brooklyn Law School and a former SEC commissioner.
"If you have a position in a solid, mainstream company like Procter & Gamble, and all of a sudden because of program trading the stock sinks, it's not an appropriate risk," she added. "I'm just a public investor, and I don't like it. The SEC should figure out what happened and take appropriate action. I don't think it's a question for courts."
Bill Singer, a New York securities lawyer, suggested an investor might have to show "gross negligence" in order to maintain a case against the exchanges themselves.
"They have the right to break a trade when the underlying cause is not of their own origin," he said. "If the market disruption is the result of some internal issue at the venue, they might have a problem."
Angel added; "As far as I know, an exchange has never been held liable for trading losses by its participants, but in today's litigation roulette, someone will try it."
Recent examples of trading being upset have concerned individual stocks rather than entire markets.
On April 28, 2009, shares of biotechnology company Dendreon tumbled almost 70 percent as investors awaited a study about its vaccine to treat prostate cancer.
No one at the time could justify the speed of the decline. Shares recovered the next day after the study's results were released.
UAL shares lost three-fourths of their value on Sept. 8, 2008, after a news service erroneously said the United Airlines parent sought bankruptcy. That case, however, differs in that investors were reacting to specific news in the market, though that news later proved false.
Some investors may allege in arbitration that brokers breached fiduciary duties by failing to stop aberrant trades. But Fisch said "most accounts don't even give the broker that authority to say, 'I should check back with the customer.' It would be problematic to give them that discretion."
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