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Direct Investing Case Study

Understanding how Markets Operate Critical for Discount Brokerage Clients

You are on: The Problem

From the Perspective of the Client

A client of the RBC online discount brokerage complained that RBC® made an error and failed to correct it. The client had gone online to cancel a purchase order placed earlier that day, and confirmed on screen that the cancellation order was placed. He assumed that meant the cancellation had been finalized, and continued on to place another order to purchase the same security at a different price, which was filled. Subsequently, the first purchase - which he had ordered cancelled -- was filled and posted to his account. When the client sold out of the double purchase, it created a loss. He felt that RBC should compensate him for the loss because its literature misrepresented the services being provided and the risks of using them.

From the Perspective of RBC

RBC advised they would not compensate. The client's transactions were in strict accord with standard operations for the stock market, clearly outlined in the account agreement the client signed when he opened the account. Orders only clear once they have been filled and processed by the stock exchange, not when they are placed. When the client placed the cancellation, it was confirmed on the view screen with a warning that the cancellation would be made on a "best effort" basis, depending on whether or not the original purchase had already cleared.

You are on: The Resolution

The Office of the Ombudsman Reports:

"The client and RBC were unable to agree.

During our investigation we found that the account agreement the client signed clearly spelled out that all transactions were subject to stock exchange practices and rules. Additionally, we confirmed that the computer screen did warn that the cancellation order would be completed on a 'best effort' basis.

We felt RBC had acted fairly - following established practices, warning the client and living up to the account agreements that were signed by the client. The contract had not been breached, and we felt there was no reason to compensate.”

You are on: What Can be Learned

For RBC:

As a discount broker, RBC simply conducts transactions and does not give investment advice. Without crossing that line, RBC can continue to provide clients with assistance by encouraging them to read their account agreements carefully and educate themselves about market and stock exchange practices.

They should also continue to provide easy access to investing information, with a focus on order-cycle and stock exchange practices.

For Clients:

“Make sure you have a comfortable level of knowledge of the risks, and of stock exchange rules and operations before you decide to use a discount broker. You should be able to understand terms like "place," "fill," and "best-effort." Orders "placed" by discount brokers are subject to usual stock exchange practices.

Buying and selling within a short time frame, say a 24-hour period, can be a great opportunity but also risky, so it’s critical that you have a clear understanding and accept the risk involved. When using a discount brokerage, where advice is not part of the service, clients should make sure they have carefully read and fully understand all the agreements. Remember, this is "self-serve" investing.