From section 5 of IG Index's own T&Cs....
"The figures we quote will be in respect of the level of our Index and not the level of an Underlying Market, and you acknowledge that the level of our Index may be different from the level of an Underlying Market."
In law it is generally regarded that when one party warns the second party of a condition or obligation that the first party is considered to also be aware of the same factor. In this case the firm warns the client that the firm is entitled to quote prices which are away from the underlying market. This seems to clash with aspects of MiFID which have been commented on? Regardless of MiFID the firm would appear to be specifying that they can quote prices which suit them given particular situations. One assumes this is for financial gain on their part. The type of warning issued implies the potential for detriment on the client’s part. Therefore, at a later date, is it reasonable for the firm to claim that its quotation was "incorrect"? How is the client supposed to tell the difference between an 'incorrect price' and a price which the firm is purposefully quoting 'different from the underlying market'?
In my opinion, the firm, through its T&Cs, warns the clients of two very distinct facts;
1 That the clients are betting against the level of the firm’s own derivative product (index).
And
2 That the firm has the right to quote prices which don’t necessarily reflect the price of the underlying price on which the firm’s derivative product or index is based.
Therefore, given that the firm has specifically warned the client on these points, the client is also entitled to specify the following;
1 The firm acknowledges that clients bet on the price of the firm’s own derivative product or index.
And
2 (Most importantly) The firm acknowledges that clients are allowed to place trades based on quotations even when that quotation doesn’t reflect the price of the underlying market.
The warnings issued by the T&Cs are not simply a ‘one way street’ which allows the firm to run over the clients. There is, in law, a balance to each term which means that the client has equal but opposing rights. In this case, when the firm warns the clients that it has the right to quote prices which are different to the underlying market, the firm has an opposing liability; that it cannot reasonably determine prices quoted away from the underlying market to be ‘wrong’. It’s a case of swings and round-a-bouts; the firm inserts that clause because it has calculated that it is financially beneficial to include such a term (the firm wants to retain the ability to quote in such a manner) – the downside is that there may be times when it not beneficial to allow clients to trade under such conditions. The case being discussed appears to be one of those events. At the time of the disputed trade the firm (either the dealers or the firm’s electronic algorithm) decided to quote a price which was ‘different from the level of an underlying market’. The firm then accepted legally binding deals based upon the quoted prices. The firm then decided retrospectively that it did not wish to be bound by such deals.
It appears to me, at face value, that firm is trying to gain the best of both worlds; it is happy to use its ability to quote prices which differ from the underlying when it suits them yet if, in hindsight, the firm discovers a situation which is non beneficial it decided to try and reverse the trades? That does seem rather unfair.
Of course none of my demented rambling affects the points that I have previously made; that the pivotal point in this matter is the moment that a bet is accepted by the firm. Clearly in this case the firm appears to act in a manner which indicated that it has the right to reconsider the clients offer (to enter and/or exit a bet) AFTER acceptance has taken place (given that a contract note has already been issued). This would never wash if the matter was escalated. Likewise I would suggest that the firm cannot simply enter a trade (or ‘adjustment’) onto a clients account to reverse such a trade without the direct consent of the client. As I said before, the firm’s ability to insert such an adjustment via its back office system doesn’t automatically give them the legal right to do that. Any such adjustment has to be done through the relevant protocol. In this case I would suggest that all the firm can do is contact the client and explain what has occurred (ie that the firm feels that the prices became inaccurate). The firm can ask the client if he or she is willing to agree to the cancellation of the bet by means of an adjustment. However, in just the same way that the firm has the right to accept or reject a proposed trade, the client has the right to consider the firms offer. By simply entering the adjustment onto the clients account the firm would be implying that the client has already agreed to such an agreement and this appears incorrect.
Again I would stress that the correct course of action would be for the client to contact the firm and specify that he or she is not accepting or agreeing to the adjustment. At that point the firm would surely be duty bound to remove it?
Steve.