IAB to Pay $667K After Losing Arbitration Case Related to Margin Call

Feb 19 2015 | 4:13pm ET

Interactive Brokers (IAB) has been ordered to pay $667,000 to hedge fund Glen Lyon Long Term Options after a FINRA arbitration panel found that the system used by the discount broker to automatically sell securities from customer accounts had malfunctioned.

The claim, which was initially filed in 2012, stems from IAB’s policy of requiring customers trading on margin to let the firm automatically liquidate securities in the case of a margin call. 

According to Glen Lyon, however, the system exacerbates minor margin calls and turns them into much bigger problems. 

In one instance cited in the arbitration, IAB began automatically selling securities in Glen Lyon’s margin account once it racked up $20,000 in losses. However, it did so for off-market prices, and then revalued the rest of the hedge fund’s portfolio at those values. This created a spiral that ballooned the deficit faced by Glen Lyon, and resulted in significant losses for the hedge fund.

Counsel for Glen Lyon argued that while IAB clearly has the right to protect itself when a customer’s account falls below margin thresholds, it must do so in a “commercially reasonable” manner. 

FINRA’s arbitration panel apparently agreed, although it awarded Glen Lyon significantly less than the $1-$3 million it was seeking from the proceedings. 

Interactive Brokers is one of the largest discount online brokerage companies in the U.S., executing more than 580,000 revenue trades daily.

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