Incorrect Date Costs Broker Nearly $23M in Liabilities
A trading regulator found discount brokerage Interactive Brokers liable for posting an incorrect date and awarded a New Jersey man a record $2.4 million in damages.
But that’s only a fraction of the $22.7 million he lost on a botched trade because of the bad information.
The pyrrhic victory for day trader Frank M. Cerisano Jr. by the Financial Industry Regulation Authority is three times the next-largest award against IB, according to Cerisano’s lawyer, Sam Lieberman of Sadis & Goldberg.
Cerisano plies his trade in the backwaters of day trading — derivatives and the esoteric future contracts, where millions can be bet with little upfront.
This special breed of people manage to get to sleep at night with huge positions hanging fire as Asian markets can take out a wager in a flicker of the screen.
The last thing a futures trader needs is to have his trading platform also go against him. This is what Cerisano and his lawyer alleged.
In June 2013, Cerisano was taking a huge position in VIX Futures that climbed as high as $200 million with leverage.
The Chicago Board Options Exchange’s Volatility Index (VIX) was on the move then. In the six weeks prior to the position, the VIX spiked nearly 42 percent on central banks sending markets mixed messages of future easing.
If the trade had been executed on the expiration date Cerisano found on IB’s website, he would have netted roughly $2.5 million in profit.
But IB maintained the expiration date was the following day, which created a huge loss as the VIX moved dramatically away from Cerisano’s position.
The botched futures trade appears to be human back-office error at IB, which used the correct expiration date internally, but then inexplicably displayed it as a day earlier on its website, which Cerisano used to price his gains.
Interactive was not accused of fraud. But Cerisano certainly felt misled.
At the IB internal expiration date, the broker dealer settled the trade and took $25.3 million out of Cerisano’s account, according to his lawyer.
Cerisano is said to be one of Interactive’s largest derivative traders.
When Cerisano figured out what actually happened, he lodged his complaint. Instead of sympathy and recompense, he got the cold shoulder, according to his attorney. “My client has had to pay tens of millions of dollars in commission to Interactive Brokers over the years, so he was surprised that that was the approach, even when they were caught red-handed,” Lieberman told The Post.
Some trading experts were surprised at how the events played out.
“Someone sophisticated enough to manage a $100 million VIX Futures portfolio also has the resources to verify something as simple as the expiration date of a product, particularly if that expiration poses significant risk to their portfolio,” said Mark Longo, a former trader at the Chicago Board Options Exchange and CEO of industry news outlet The Options Insider.
Still, it may not have been that simple. The back office at Interactive Brokers may have been thrown into confusion, too, Lieberman said. The industry had changed the expiration date of the relatively new VIX Futures on several occasions since 2011.
Others say the fiasco illustrated some disturbing aspects of modern electronic trading. “Many of the back-office systems are so antiquated in the options and futures markets,” said Chris Nagy, a market structure expert and CEO at the KOR Group. “Humans do make mistakes, and computers don’t know enough to understand those mistakes.”
Lieberman said there are a lot of other investors who potentially incurred losses on VIX Futures through Interactive. “They just haven’t looked at their account statement to see the difference,” he added.
Interactive Brokers, based in Greenwich, Conn., had no comment for this story.
It’s not the first time Interactive has run into trouble with its online system and the regulators.
Last month, for example, a reported $667,000 was awarded by a separate Finra arbitration panel in another Interactive case. The discount broker was ordered to pay that amount to a hedge fund that suffered losses when Interactive’s system was found to have malfunctioned.