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The (First) 2015 Market Break: What Will This Mean For Arbitration?
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Readers don’t need to look here for news or advice about the stock market, but we do want to explore a bit how the current market break will impact claims at the FINRA forum and, perhaps, elsewhere.

According to SIFMA’s “Dashboard” publication for the week ending August 21, the 52-week range for the Dow Jones was 15,855.12-18,351.36. That low was tested this week and has held for the interim (as we write, the DJA stands at 16,645), but one can see that the gains for the past year have all but evaporated. The fall was precipitous and the recovery started right away, so investors may be inclined to hold, not panic, and, correspondingly, not claim “foul” at their broker’s hand.


One can expect that some margin calls went out and were not timely answered. The houses have been reminded time and again by the regulators of the need to avoid margin deficits through adequate liquidation procedures and the obligation to warn customers of the consequences of insufficient margin or overmargining. Still, some member-customer cases will clearly derive from this tumble and margin investors, for their part, are likely to have gripes about the way they were sold out (which securities the house chose to sell, how much liquidation occurred, the timing and the lack of warning). Claims relating to faulty or failed executions for those who sought to exit the market before the decline or at its start seem likely as well. (ed: Experienced friends tells us to watch, in particular, for claims arising out of inability to access online brokerage accounts, mispricing of ETFs, and inability of funds to price their portfolios at the end of the day.)

We took a look at the margin statistics FINRA posts monthly on its Website (ed: this is a great resource, albeit one that lags). Margin debt, we know from past SAA reports, have surpassed the half-trillion mark before (four mos. in 2014), but, by January 2015, debit balances in customers’ securities margin accounts had subsided to $485.9 billion. Then, the DJIA stood a bit below 18,000 and the market has progressed through the year, until the recent rupture, in a fairly narrow range. Given that horizontal pitch, we were somewhat surprised to see that margin debt has risen about 17% to $548 billion, as of the end of June 2015 (most recent figures). $548 billion is the highest posting of margin debt we could find in FINRA’s records. We recall the heady days of the 2000 Tech-Crash, when we were exclaiming about a $300 billion margin debt total. In that case, there was a sustained crash and, in the aftermath and before the bounceback, the margin debt halved (Oct. ’01: $152B).

Looking Ahead

Whatever the results were in July, they are likely to be a lot lower by the end of August. Whether this decline proves to be a douse of cold water or a dam break, investors have already lowered their exposure and houses have certainly forced margin liquidations. What further will come, as this summer surprise continues, will not only determine margin debt levels, but also the level of claims that FINRA will experience. Investors will be far more likely to pursue claims for suitability (or BFD) or misrepresentations and fraud, should a sustained market break cement substantial losses. In any case, the case filings that would follow will surely not be visible in the FINRA statistical reports we pore over in the next few months. (SAC Ref. No. 2015-32-01)

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