Spark Global Limited Reports:
Robin Hood is at the center of an unprecedented and landmark Reddit trading frenzy. Amateur traders piled into Reddit’s stock earlier this year, sending shares of GameStop (GME) and other companies, including headphone maker Koss (KSS) and theater operator AMC (AMC), to extreme levels.
However, the popular trading app has been accused of selling Shares in Reddit without customers’ permission.
The unauthorized sale of stock from a client’s brokerage account in order to maximize a broker’s commission is generally considered unauthorized and illegal trading.
The extent to which a broker is authorised or not authorised to sell your position depends on the type of broking agreement and broking account entered into by the dealer.
However, unauthorised selling of positions in online discount stockbroking accounts is rare.
That is, your first resource should be your client agreement that you sign when a brokerage account is established. This document Outlines all permissions and permissions granted to agents to execute on your behalf.
Discretionary account vs non-discretionary account
According to the Financial Industry Regulatory Authority (FINRA), unauthorized trading is one of the issues that traders and investors should be most aware of.
In general, if a broker sells your position without your consent and knowledge, they may be liable for unauthorized trades. In this case, the main issue is to determine what kind of account you have with that broker.
There are various types of brokerage accounts, some of which are subject to unauthorized trading rules and some of which are not. In this blog post, we’ll focus on discretionary and non-discretionary accounts, and margin accounts.
A “discretionary account” is an account in which a brokerage firm can make individual trades without the client’s consent.
If the terms of your client agreement with a broker give the broker discretion to conduct transactions on your account, you have agreed in advance that the broker may not be liable for unauthorised transactions.
Accounts that cannot be controlled
Non-discretionary accounts, on the other hand, give the customer the power to always decide whether or not to trade.
Therefore, the account must be non-discretionary in order to qualify for unauthorized transactions. Basically, a non-discretionary account means that a broker must obtain prior consent before trading any securities.
If your account is non-discretionary and the broker sells some securities without your consent, he may have violated several securities laws.
What if you have a margin account?
While laws on unauthorized trading vary from state to state, there is an exception that allows brokers to make non-discretionary trades without the prior permission of their clients.
For example, if you have a margin account that is worth less than the broker requires, they may be able to sell your position without seeking your prior approval.
Basically, a margin account is a brokerage account that allows you to borrow money through a broker to buy margin securities.
Buying stocks on margin allows you to buy more stocks (purchasing power) than you could with the money in your cash account.
The minimum requirement for margin accounts is $2,000, but your leverage is 2:1, which means that if you have $2,500 in your account, your purchasing power will reach $5,000.
Consider the scenario where you buy a stock for $200 and its price rises to $250. If you use a cash account to buy shares, you will get a 25% return on the trade.
But if you bought the stock on margin, paid $100 in cash and borrowed $100 from your brokerage, you would get a 50 percent return on your investment.
However, not all stocks bought on margin will appreciate. If stock prices fall, your losses are magnified in the same way.
Using our example, a $200 stock that falls to $100 will lose 50% on the cash account and 100% on the margin account (plus interest on the $100 loan).
If the value of the collateral on your trading account falls below the required margin threshold, the broker may issue margin calls.
Basically, this is when your broker asks you to immediately deposit additional securities or cash to increase the value of the account above the maintenance margin in order to repay the money you borrowed.
If you fail to make a margin call, the broker has the right to seize your position and begin liquidation to recover the loan.
article links：Can a broker sell your position without permission?
Reprint indicated source：Spark Global Limited information