Trade Errors: Legal Resolution and Prevention Methods

Trade Errors: Legal Resolution and Prevention Methods
trade errors

At first blush, trade errors seem like an absolutely detrimental situation. It’s possible that investors could experience extreme losses, and clearly, mishandling investor funds is not an ideal situation. Then there is the presence of various regulatory bodies, including the SEC. When a regulatory body begins an investigation of a trade error, it’s possible that the entirety of the business can be put at risk.

Many firms work to put together specific policies and procedures to address trade errors and correct trade errors when they’re identified. A firm may have specific forms to track placement orders, security trades, sales of securities, and assess when the purchase or sale was related to the incorrect security for trading. Regulatory bodies and investors want to see a specific action taken to prevent errors and to take immediate action when errors occur.

Are Trade Errors Common?

Trade errors and investor mistakes are extremely common, more common than anyone would care to admit. However, these errors are typically part of the learning process, and that’s why it’s often on the firm to have procedures in place to prevent these errors from going through.

Typically you would expect a trader to buy and sell options and hold those positions for smaller time frames. Of course, with a high increase in the number of transactions comes a high increase in the possibility of error. There’s also the common point of a trader not working out a plan with their investor and ‘free-wheeling,’ which goes far beyond a trade error and becomes a serious operations problem.

What Counts as a Trade Error?

Trade errors that can involve buying the wrong security, selling the wrong security, buying or selling the wrong volume, making a purchase instead of a sale, executing at a price point outside of the agreed-upon range, trading under the wrong account, and even violating the investment agreement or program.

It’s evident that many of these can be human errors from transposing numbers or simply accessing the wrong account or the wrong security. Traders are expected to be extremely detail-oriented, but even those who are diligent in checking their work could make the occasional mistake.

A few other common trade errors include duplicating trades or executing trades multiple times. These types of mistakes can happen from simply clicking the mouse too frequently or not patiently waiting for one page to load into another.

Are There Always Legal Consequences?

Regulatory bodies, including the Securities Exchange Commission or the SEC, work actively to catch errors. They review the data exchange by sellers and buyers as well as third parties to identify and determine discrepancies. The idea is that with a regulatory body participating in this, then they can resolve discrepancies before trades settle.

On an internal level, compliance teams should be identifying errors and using exception reports to help investigate why they happened and how to correct it.

There are always possible legal consequences that come from a trade error, but it is up to the regulatory bodies and the investors to determine if they will act on those possible consequences. The SEC may identify the error and then confirm that the air was identified internally and corrected immediately. In that case, they may not pursue legal action. Investors often work in the same line of thinking. If an investor gets a call from their firm that trade was mishandled but corrected, they’re less likely to take legal action.

Consult a Business Law Attorney on Trade Handling and Error Correction

It is possible to face the legal consequences of committing a trade both from investors and regulators. Additionally, trade errors are fairly common, and businesses should take care to ensure that they correct raid errors as soon as they are identified. When a firm has a history of trade errors, it should also be able to show how they’ve corrected those errors and what they’ve done to prevent them from happening again in the future.

Anyone facing legal consequences with the SEC, other regulators, or their investors should consider consulting with a business law attorney. You may need to prove what prevention methods you have in place within your companies and how the trade error occurred. Simple human error is one of the most common reasons for trade errors, and it’s likely that you’ll need to show how your policies and procedures would prevent human error. Speaking with a business law attorney in Connecticut can help you assess the best way to approach this issue and how did it defend your business.

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