Brokerage firms owe their customers a duty of fair dealing, which includes the duty to disclose certain “material information” (i.e., information the average customer would consider important to the investment decision at hand). SEC Guide to Broker–Dealer Registration (April 2008).
Although the issue of materiality often turns on the facts and circumstances of a particular case, securities regulators have expressed the view that broker dealers should disclose and educate customers about the various order types and alerts that are available to them. See e.g. Federal Register, Volume 76, Issue 32 (February 16, 2011) (“the commission believes the regulatory framework should promote the ability of investors to understand the key attributes of order types offered by their brokers so that they can make an informed choice as to whether to use a particular type of order. This is especially true with more complex order types, such as stop-loss orders[.]”); FINRA Regulatory Notice 16-19 (FINRA encourages firms to review their practices regarding stop (or stop-loss) orders, with an emphasis on educating investors regarding the risks and benefits of stop orders . . . .”).
The specific order types available to customers varies from firm to firm, but generally they include market orders, stop orders, and limit orders. Stop orders are generally orders to buy or sell a stated amount of a security when the market price hits a certain trigger price. Stop sell orders are often entered to lock in gains on a stock that has increased in price. Stop buy orders are generally used by short sellers to limit losses from an increase in the stock price. An important aspect of stop orders is that, due to the time lag between the order being triggered and the execution of that order, the sale price may be significantly different to the trigger price. Thus, in a rapid market decline, the market price at execution can be significantly less than the trigger price. Limit orders are orders to buy or sell a stated amount of a security at a specified limit price or a more favorable price.
Stop and limit orders can be beneficial to investors who do not have the capacity to constantly monitor the market, and may be especially important to short sellers because the potential losses on short sales are unlimited.
If you have suffered investment losses because your brokerage firm failed to instruct you about available order types and alerts, you may have a legal claim against the firm. Call us toll-free at 888-607-4819 for a free consultation and case evaluation or send us an email message through our “Contact” page.