Stop Loss Order Liability Broker: More and more traders are using stop loss orders as a trend. These stop loss orders make sense in and of themselves. Trading through an online broker or discount broker has several advantages. However, as our lawyers know through daily client contact, trading with an internet broker also carries special risks.
Dangers of stop-loss orders with online brokers
The problems of day traders and investors using online brokerage are increasing, especially after volatile price movements on the stock exchanges. For example, they encounter problems setting up a brokerage account or the prices are temporarily unavailable. Moreover, their money is often lost because the order was not processed in time.
Stop Loss Orders: How to use them
A stop loss order is similar to a regular securities order. It is placed by the investor. However, it instructs the broker to sell the underlying security at a specific price below the current quote.
Why is a stop loss order used? It allows the investor to protect existing profits and minimise losses.
There is no certainty that the market will actually fall below the stop loss price. If the price exceeds this threshold, the order is immediately converted into a best order. The final selling price may therefore be below the stop price or, more rarely, above it. How far should the stop loss point be from the current price?
If a stock is “picked up” at its too-close stop price on a bad day and then blithely continues to rise, a triggered stop-loss order is one of the most frustrating things that can happen in the stock market. However, if the investor sets the stop loss too low, he could be prepared to accept large price losses. Even before the order is executed.
Special features of stop loss orders for shares
Buying shares and taking bets on the performance of the stock market does not seem to satisfy all investors. Most of them prefer to buy leverage certificates. These represent a safer form of investment. In this context, structured financial products are instruments whose value fluctuates depending on the performance of other assets.
This means shares, commodities or precious metals. The certificates can be leveraged, which is an advantage. The investor believes he can avoid the total loss associated with a knock-out certificate. And he does so by instructing his broker to place a stop loss order to sell the security before the knock-out threshold is reached.
What is the stop loss order useful for?
Stop loss orders are a type of limit order. They are mainly used in the stock and ETF markets. The purpose is to protect investors from excessive losses, also in exchange-traded funds. It can be difficult to keep track of every share or exchange-traded fund in your portfolio every day.
Especially if you already own a significant number of these investments. You will not have the opportunity to buy and sell shares and other investments all day at the same time as the stock market during trading hours. With a stop loss order, you can protect yourself from potential losses when the price starts to fall.
Stop Loss Order Liability Broker – Breach of Duty
A lawyer will first determine whether there is a breach of contract claim against the online broker.
If an internet broker has promised its customers that their orders will be processed in seconds, but instead takes several hours to transmit them to the stock exchange (see Nuremberg-Fürth Regional Court, Case No. 14 O 9971/98), the broker can be held liable.
Discount brokers often have few options to defend themselves if an order is late due to circumstances beyond their control. You can read why discount brokers are liable for the actions of their vicarious agents as for their own actions in the judgement of the Nuremberg Higher Regional Court of 24 November 2003, file no. 8 U 36/03.
The Federal Supreme Court (BGH) has ruled that a bank or an online broker cannot waive these duties in its general terms and conditions (BGH, judgement of 12 December 2000, ref. XI ZR 138/00).
The question of whether an obligation to quote existed becomes significant if the delay in trading occurs because the market maker or designated sponsor temporarily ceases to quote prices or quotes.
Stop Loss Order Liability Broker: Online brokers may be liable for damages if they fail to prevent a financial intermediary from intentionally harming investors by using their services (see BGH, judgement of 9 March 2010, ref. XI ZR 93/09).
Is the broker liable for insufficient information?
Because the direct bank did not follow the stop loss order, the customer suffered considerable losses when the knock-out threshold was finally reached and the securities expired.
Since the issuer of the certificate did not provide quotes, the broker as a direct bank could only have placed a precautionary stop loss order if something had gone wrong.
When buying futures or certificates with a knockout threshold, even a stop loss order mechanism cannot prevent a loss, so the customer’s agreement with this fact is an important factor when choosing a broker.
This is the conclusion reached by the Regional Court of Heidelberg, which in its ruling of 11.08.2016 (Case No. 2 O 407/15) held that a direct bank breaches its duty of disclosure if it gives the impression that the risk of loss is adequately hedged by the use of automated stop and loss orders.
Losses due to delay: Is broker liable?
An investor can lose a lot of money if an online broker either fails to execute an order or takes too long to execute it. If he does not act quickly, he is forced to pay more to buy the securities or accept a lower price when he sells them.
However, if the investor delays the transaction at an unfavourable price, the calculation of damages is a piece of cake. The loss results from the discrepancy between the ideal trading time and the actual time. Similarly easy to calculate are the losses caused by an online broker not executing a sell order.
Less easy to answer is the question of how high the loss would be if a buy order was never executed by the online broker. The reason for this is that the actual profit or loss from a securities transaction is only known when the security is sold.
According to case law (Nuremberg Higher Regional Court, judgement of 24 November 2003, ref. 8 U 36/03), this is often based on the price on the last day of the transaction.
Online brokers do not always keep their promises
Because of the need to make a profit with the low-price model, neo-brokers often offer only a few services. One problem is that there are not too many places to trade. This means that consumers have limited opportunities to compare prices.
Secondly, not all types of orders are available at all trading venues through Neo-Broker. Some orders, such as those that limit or stop losses, or those that combine both, are not included. In some cases, only quote request orders are made available on certain exchanges. The client is forced to send a quote request to the market maker.
Danger of stop loss orders: lawyer helps with difficulties
Potential buyers of leverage certificates or knock-out certificates should therefore know that they are not safe from a total loss even with such a sell order. Stop Loss Order Liability Broker: Delays in the stop loss order, breaches of duty by the broker or incorrect advice by the broker are reasons to consult a lawyer.
You are welcome to use the free initial consultation by the Herfurtner law firm. Please contact us immediately for this purpose. This is possible by telephone or via our contact page.