Market volatility likely to lead to outbreak of Finra arb cases

Market volatility likely to lead to outbreak of Finra arb cases
Arbitration experts say similar market disruptions in the past resulted in more investor claims against brokers
MAR 10, 2020

Extreme market volatility caused by concerns about the coronavirus is likely to cause an outbreak in Finra arbitration cases, two experts predicted in a recent blog post.

The market gyrations inevitably will generate claims by investors against their brokers as they question whether financial professionals had their backs as their accounts fell precipitously.

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, wrote that the effect of past market disruptions on arbitration illustrate what’s likely to happen this time around.

They point to the “Black Monday” crash in October 1987, the “Tech Wreck” in 2000 and the financial crisis in 2008-09 as examples of severe market downturns that led to an increase 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 endured a 7.5% plunge on Monday, its worst since the financial crisis. Early Tuesday afternoon, the Dow Jones Industrial Average was up about 100 points.

“The market volatility enhances the prospect of even more arbitration cases than a pure down market,” said Mr. Friedman, a former director of arbitration at the Financial Industry Regulatory Authority Inc.

It may take a while for the arbitration traffic to tick up. The number of Finra arbitration cases peaked at 8,945 three years following the tech disruption in the early 2000s. Cases then declined until the financial crisis, spiking again to 7,137 in 2009.

During the prolonged bull market, which was stampeding until the coronavirus hit, Finra arbitration cases dropped significantly. Last year, there were 3,757 cases filed, down from 4,325 in 2018.

The kinds of cases that could start percolating include those centering on suitability, execution, overconcentration, margin and employment, Mr. Friedman and Mr. Ryder wrote. An execution case, for example, could be based on the failure of an online broker like Robinhood to maintain trading capability during market chaos.

The spread of the coronavirus could force a change in Finra arbitration operations, Mr. Friedman said. There may be a reluctance to have the parties in a case gather in a physical location for a hearing.

“It’s going to cast a new light on online arbitration and video conferencing,” he said.

On Monday, Finra released guidance for brokerage firms on business continuity plans. The self-regulator didn’t mention any adjustments to arbitration procedures.

As the coronavirus continues to spread, the market is not likely to calm down. That increases Mr. Friedman’s confidence that his and Mr. Ryder’s projections about arbitration cases will come true.

“I’m more convinced now, given the volatility,” he said.

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