Stock market orders: the share price adopted for the provision check must not be obsolete

The facts

Mr A informed me that, on 9 April 2020 at around 10.30 am, he and his wife had sent "no limit" buy orders for X, a biotech stock, specifying to their account-keeper the amount of the cash balance on each of the PEA equity savings plans, namely €27,915.61 for his plan and €17,344.08 for his wife's PEA plan.

At the end of the day, however, Mr A observed that:

• on his PEA plan: 212,261 shares had been bought for a total amount of €160,012.94;
• on his wife's PEA plan: 121,225 shares had been bought for a total amount of €91,401.88.

In view of the seriousness of the situation, Mr A then contacted his account-keeper. In reply, the latter told him it had not noted any execution anomaly: the orders had been sent in a situation of trading reservation[1] of security X (reservation between 9.46 am and 1.53 pm) as "no limit orders", and had been executed on the basis of the first quoted price when trading resumed (€0.75).

Mr A, on the other hand, asserted that he legitimately believed that since the transactions were carried out on PEA accounts and preceded by funding of the corresponding cash accounts (as required when entering an order), the transactions could not exceed the recorded amounts and available balance.

Considering himself the victim of a dysfunction on the part of his account-keeper, Mr A therefore referred the matter to me to obtain a rectification of the situation, and in particular of the exorbitant debit balances noted on the two PEA plans.

The investigation

I contacted the account-keeper of Mr and Mrs A several times, and asked it for its observations, particularly regarding the following points:

• the investor profile and experience of the clients, particularly regarding the use of no-limit orders and the issue, where applicable, of an alert relating to unusual orders;
• the information available to Mr and Mrs A regarding the trading reservation of security X when they placed their orders;
• the verifications performed upon receiving the orders, specifying the price adopted for the provision check.

The account-keeper first told me that, over the past five years, the clients had sent a very large quantity of sell and buy orders on the stock market via internet, very often for high-risk securities related to the biotech sector. Thus, in addition to knowledge of the markets, they also had experience. According to the financial institution, Mr and Mrs A had good knowledge of security X because they had bought and sold it several times in the past and had made it the main component of their portfolio at certain times.

The bank said to me that Mr and Mrs A had not been alerted to the unusual nature of their orders due to the fact that they were designated as "no limit" orders. A warning message in this sense is systematically presented to clients who have not placed a "no limit" order in the past twelve months. But this was not the case in this instance, as shown by the record of the clients' transactions.

As regards specific information appearing on the security fact sheet concerning the ongoing trading reservation, the account-keeper told me that Mr and Mrs A had access to the order book and the intraday summary revealing the absence of an opening price, trading and volumes, and price movements throughout the day, showing no indication at the time when they placed their orders, since price quotes for the shares resumed at the start of the afternoon. The bank considered that all these indicators should necessarily have attracted the clients' attention.

The institution also specified that Mr A and his wife had regularly been asked, by posting a warning message, to update their client and financial profiles, which they had never been willing to do, even when sending the buy orders for the shares in X, on 9 April 2020.

In addition, the account-keeper confirmed to me that four buy orders had been entered on the PEA plan of Mr A and two on his wife's PEA plan. It specified that its interface allowed users to enter an order as an amount, but that it is automatically converted into a number of shares. In the case in question, the orders of Mr and Mrs A were effectively entered for cumulative amounts not exceeding the funds available on the cash accounts of the PEA plans.

The institution added that the estimated amounts and conversion into a number of shares had been communicated to the clients and that the provision checks had therefore been performed on the basis of the latest information available to the bank, notably via the order book.

The account-keeper stressed that by placing "no limit" orders, the clients had taken and accepted the risk of execution without a price limit. Accordingly, when prices were quoted again at the start of the afternoon of 9 April 2020, trading in security X took place at a price of €0.75 and the clients' orders were executed at this price.

It confirmed to me that the transactions had resulted in a very large debit balance on each of the PEA plans, infringing the regulations applicable to them. However, since there was no dysfunction, it told me that it maintained its position, considering that the correction of a possible error by the bank, which had not been demonstrated, was not justified.

Following these numerous conversations, I performed a careful examination of all the aspects of this case, and in particular of the investment habits and investor profile of the clients who had, in particular, refused to fill in their client questionnaire (the consequences of such a refusal were explained in a previous Case of the Month),[2] and the information available to Mr and Mrs A concerning the trading reservation in progress at the time when they sent their orders. Although it would have been preferable, in my opinion, that an indication specifying the "reserved (limit up or limit down)" status of the security X be visible when placing an order, it seemed to me that the available information could enable Mr and Mrs A to understand that there were special market conditions prevailing when they sent their orders.

This type of case always leads me to investigate precisely the conditions in which the provision check is performed. It was at this point that I noted, for the first time, that this check had been performed on the basis of an obsolete share price.

More precisely, I noted that as is normal, the orders of Mr and Mrs A on the cash market had been received by the bank performing a function of reception and transmission of orders, which then systematically checked the provision, doing so on the basis of the last quoted price. It is therefore at the stage when the order is given, and not when it is executed, that the provision is checked based on the last quoted price.[3] Likewise, the orders entered as an amount were converted into a number of shares on this same basis of the last quoted price.