When an intermediary receives several orders from a client, can it execute only some of them? At first glance, yes, since stock market orders are theoretically independent. But does this principle still hold when the orders form an overall strategy, such as an "arbitrage" operation? This is the question to which the AMF Ombudsman has recently provided an answer.
A brief reminder of the facts
A dispute pitted a financial institution against an individual and specifically concerned an employee savings plan.
The employee intended to participate in a reserved capital increase and, to finance the operation, wished to first sell units held in a fund. To this end, he had set a floor price. As this threshold was not reached before the capital increase, the employee was unable to participate in the fundraising due to a lack of funds.
However, the floor price was exceeded one month later, and the account keeper then executed the sell order (the validity date of which had not yet been reached).
The matter of the dispute
The client contested this sale, arguing that the orders formed an arbitrage strategy. In other words, from his perspective, non-participation in the capital increase implied that the sell order, whose sole purpose was to finance the subscription, should not be executed.
The intermediary, meanwhile, refused to reverse the transaction, citing the irrevocable nature of the order and its 3-month validity (the client not having explicitly indicated an expiry date). Furthermore, it considered that it was not its responsibility to interpret the client's intentions.
The Ombudsman rules in favor of the client
The question posed to the AMF Ombudsman was therefore clear. Did these orders constitute distinct operations or did they, on the contrary, form an inseparable whole?
In its recommendation issued this week, the Ombudsman unequivocally sided with the client. "In accordance with Article 1186 of the Civil Code, when the execution of several contracts is necessary for the performance of the same operation and one of them disappears, the contracts whose execution is rendered impossible by this disappearance become null and void", it reminded in the preamble.
Of course, this principle is only valid if the contracting parties are clearly aware of the overall strategy. However, according to the Ombudsman, there is no room for doubt here, as the client had indeed used the term "arbitrage" and had specified that in the absence of a sale at the indicated price, this arbitrage operation would not take place.
"The professional could therefore not ignore that the two orders constituted an inseparable overall operation. Consequently, in my view, as soon as the subscription period had ended, the sell order should have been automatically considered null and void", the Ombudsman emphasized, noting that the institution finally agreed to cancel the sale.
Orders forming an overall strategy can therefore be considered inseparable, and even if it is not the responsibility of a financial institution to interpret a client's instructions, a professional cannot ignore this principle once the client has clearly expressed their intentions.
