Large Market Sell Order Sweeps an Illiquid Book at Altai Resources
At 09:45 a retail client instructs a Mongolian broker to sell 500,000 shares of Altai Resources (ALT) 'at market'. ALT's average daily volume is 80,000 shares. The visible book shows bids of 1,000 shares at MNT 2,500, 2,000 at MNT 2,450, 5,000 at MNT 2,400, 20,000 at MNT 2,200, and little depth below MNT 1,900. The broker's order system sends the order to the continuous session. It executes down to MNT 1,800, and the last price falls 28% from the previous close. The broker had a pre-trade rule blocking orders priced more than 10% away from the last price, but a dealer overrode it with a supervisor code. The client, aged 72, had not traded ALT before and was not warned that a market order could sweep the book. The exchange is reviewing whether the trades should be cancelled under its error-trade rules.
1. Assess the broker's conduct on best execution and order handling. Did it breach its duties?
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Best execution. A client instruction 'at market' does not relieve the broker of order-handling duties. The broker knew ALT was illiquid, with average daily volume of 80,000 shares, and the order was more than six times ADV. A market order was unsuitable without a warning. The broker should have discussed a limit price, a worked order or a block/auction. The 10% pre-trade block was a key control; overriding it with a supervisor code without documented rationale is a breach of internal policy and weakens any best-execution defence. Client factors. The client's age and lack of experience with ALT increase the need for a warning, although an execution-only client still bears responsibility for the instruction. Market impact. The sweep from 2,500 to 1,800 and the 28% price fall indicate the order caused significant impact. The broker should have considered pausing, splitting the order or seeking consent to a limit. The absence of a written warning is a serious compliance failure.
2. What controls failed, and how should the broker redesign order handling and pre-trade risk?
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Failed controls. The pre-trade price-deviation block was overridden without a documented reason or senior approval. There was no order-size-to-ADV check, no illiquid-stock warning, and no client risk acknowledgment for market orders. Dealer override authority was too broad. Redesign. Require limit orders by default for orders above a set percentage of ADV; hard-block market orders in illiquid names unless the client signs a specific risk acknowledgment; require compliance approval for pre-trade limit overrides; log the reason, approver and time; monitor concentrated orders intraday; train dealers on depth and slippage. Add a suitability flag for elderly or inexperienced clients where the firm gives advice. Error-trade policy. Define clearly what is cancellable, who decides, how counterparties are treated and how the client is informed. The firm should test the controls with simulated large orders and review dealer overrides monthly.
3. If the exchange cancels the trades, what are the consequences for the client and the broker?
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Cancellation. The exchange's error-trade rules determine whether the trades are cancelled. The broker should notify the client promptly, explain which trades stand and reconcile positions and cash. Counterparties whose trades are cancelled must be restored. Loss allocation. If the trades stand, the client bears the execution loss unless the broker breached its duties, in which case compensation may be due. If the trades are cancelled, the broker may bear the cost of restoring the market and any counterparty claims, because its control failure caused the erroneous order. Regulatory. The firm should self-report the override to the FRC and the MSE, preserve records and review whether the dealer's supervisor code was used appropriately. Client remedy. The broker should not simply blame the client's market order. It should assess whether a warning or limit order would have prevented the loss and make the client whole where its own breach was a material cause.