What Are Margin Calls and Liquidations?

18 March, 2024

When you open a brokerage account, you have the option of signing an agreement that allows you to trade on margin. You can borrow money from the broker to purchase additional securities.

Margin trading can magnify both your returns and losses. You must maintain a certain percentage of equity in your account. If market losses take your equity below the required level, then your broker issues a margin call. If you do not meet the margin call in terms, your broker could liquidate your position. While this is legal, you may be able to file a claim against your broker under certain circumstances.

Brokers make money when you trade on margin. First, they will charge you interest on the money that you have borrowed. Second, they could make extra commission on your trades (or receive payment for your order flow from a firm that executes your trade).

Your broker has an incentive to get you to trade on margin. However, they also have an incentive to protect themselves when you lose money. The same broker that encouraged you to trade on margin in the first place will now liquidate your positions, with regard to their own interests. In some cases, the financial motive blinds the broker, and they fail to follow FINRA rules.

At Rikard & Protopapas, we are broker misconduct attorneys with nationwide reach and experience. If you lost money as a result of improper margin call actions, contact us.

Why Margin Requirements Exist for Your Account

There are several rules that require you to maintain a certain percentage of equity in your account. In other words, your ability to buy on margin is not unlimited.

  • Regulation T is a Federal Reserve Bank rule that restricts the amount of money that your broker can lend you. The rule requires that you fund at least half of the purchase price of the security in cash (meaning your broker can only lend you 50%).
  • Once you make the purchase on margin, you must maintain equity of 25% of the total value of the securities in your account, according to FINRA rules; some brokers will impose additional maintenance requirements, either as a general rule or on certain securities.

How the Margin Call Process Works

The problems can begin when your equity falls below the minimum maintenance requirement. The market value of what you own is dropped, and your losses lower the cash balance in your account. Then, your broker makes a margin call.

When you get a margin call, the broker calculates how much you need to deposit into your account to bring it back in compliance with maintenance requirements. You have to ways to meet a margin call:

  • You can deposit additional cash into the account.
  • You can close some of the positions in your account to reduce the overall amount of securities that you carry.

You must meet a margin call by day 4 after you receive it.

Your broker will inform you of the amount of the margin call. If you do not meet the margin call in time or in full, the broker would liquidate securities in your account to bring your account back into compliance with maintenance requirements. They may take action before the four-day period if your positions continue to move against you, making the situation worse. Your broker will pick which securities to sell and the manner in which they sell them.

The Broker May Be Liable if They Handled the Margin Call Improperly

Brokers have the legal right to do what we’ve described above, although they must exercise due care when making forced sales. They must obtain the best possible price and use commercially reasonable procedures. The broker can still be liable for what they do in issuing margin calls and taking action.

If you have received a margin call, you will likely be reviewing your account, both before and after it is met. If the broker has taken action to liquidate your position, you may see that you have suffered an even larger loss. In some cases, the broker may be to blame for some or all of your losses. Even though signed a margin agreement, and you may have chosen to execute the initial trades on your own, there are circumstances in which you could be entitled to financial compensation.

Grounds to File an Arbitration Claim After a Margin Call Liquidation

There are a number of reasons why you can file a claim against your broker in connection with margin trading, including if they:

  • Did not properly advise you of the risks of trading on margin
  • Did not give you enough time to meet the margin call before they forced a sale of your position
  • Negligently sold the securities in the forced sale, costing you money
  • Improperly valued the securities in your account, causing the margin call in the first place
  • Incorrectly issued the margin call in the first place

If you believe that your broker acted improperly, and you suffered a considerable loss, you may be able to file a claim against your broker. Your brokerage agreement requires you to file an arbitration claim with FINRA to obtain financial compensation.

The attorneys at Rikard & Protopapas can review what happened and help you calculate how much your broker’s actions may have cost you. We can then file the arbitration claim on your behalf.

An independent arbitrator, or panel or arbitrators, will decide whether the broker owes you money, and how much they may owe you. The broker may even settle your claim before it reaches a hearing — as what happens in many arbitration cases.

Contact a Broker Misconduct Lawyer Today

When your broker has failed to uphold the obligations that they owe you, contact a lawyer at Rikard & Protopapas to learn more about what actions you may be able to take under FINRA rules. We help you stand up against powerful brokerages when they have broken the rules and cost you money.

You can reach out to us through our website, or you can call us today at (803)-805-7546 to discuss your case. We charge nothing unless we are able to help you get money from your broker.

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