MARKET VOLATILITY MAY PROMPT OUTBREAK OF ARBITRATION CASES
Arbitration experts warned that large market interruptions in the past had brought about incre investor claims against brokers. Recent extraordinary market volatility due to the coronavirus pandemic raised concerns that securities arbitration cases would rise sharply in the aftermath of the crisis.
The market volatility almost definitely will produce more claims by investors against their brokers as they question whether financial experts had their backs as their accounts fell sharply.
In their blog post, What's Past is Prologue, George Friedman, editor-in-chief of the Securities Arbitration Alert, and Rick Ryder, founder and president of the Securities Arbitration Commentator, commented that the impact of past market disturbances on arbitration shows what's probably going to happen this time around.
A Reference to The Black Monday In 1987
The experts point to the "Black Monday" crash in October 1987, the "Tech Wreck" in 2000 and the financial downtime in 2008-09 as instances of serious market downturns that prompted an expansion in arbitration claims.
“When the markets perform well, arbitration filings decline,” Mr Friedman and Mr Ryder wrote. “When there are prolonged significant market declines, the case filings surge as surely as the swallows return to Capistrano. Simply put, people fight less when they are making money, and they fight more when they are losing money.”
“The market volatility enhances the prospect of even more arbitration cases than a pure down market,” said Mr Friedman, a preceding director of arbitration at the Financial Industry Regulatory Authority Inc.
It might take some time for arbitration traffic to rise. The amount of FINRA arbitration cases topped at 8,945 three years following the tech crash in the early 2000s. Cases at that point declined until the Financial Crisis, spiking again to 7,137 in 2009.
During the prolonged bull market running until the coronavirus hit, FINRA arbitration cases dropped altogether. A year ago, there were 3,757 cases documented, down from 4,325 out of 2018.
Suitability, Overconcentration, Margin Trading, and Execution Cases Likely to Explode
The sorts of cases that could begin overwhelming the system include those focusing on appropriateness, execution, overconcentration, margin and employment, Mr Friedman and Mr Ryder wrote. An execution case, for instance, could be founded on the failure of an online broker like Robinhood to keep up trading capability during market turmoil.
The spread of the coronavirus could force a change in FINRA arbitration activities, Mr Friedman said. There might be a hesitance to have the individuals in a case assemble in a physical location for a hearing.
On Monday, FINRA guided brokerage firms on business continuity plans. The self-regulator didn't make reference to any modifications to arbitration procedures.
As the coronavirus keeps on spreading, the market isn't likely to quiet down. That increases Mr Friedman's certainty that his and Mr Ryder's projections about arbitration cases will be manifested.
“I’m more convinced now, given the volatility,” he said.
