(Note: The incident described below happened a couple of years back, but it could happen again tomorrow – and maybe this time with zombies).
As soon as the market opened today, social media and trading chat rooms blew up with reports about various platforms going down, making it impossible to place trades. Frantic statements like, “I can’t close my positions out,” “my screen is frozen,” and “I am losing thousands now,” were flying left and right.
But the first rule of online trading is that when there are technical problems like this, you are on your own.
The agreements you sign when you open a brokerage account specifically state that the broker-dealer is not responsible for technical issues related to platform functionality, connection problems with the exchange, or data feeds. This applies to their own technical issues as well as any technical issues their vendors may experience.
Sure, if you call customer service and complain loud enough you may get some free trades or a toaster, but they are not going to refund you the five grand you lost because you could not close your position.
The second rule of online trading is that technical problems will happen at exactly the worst moment. It’s a simple math equation.
Imagine there is some terrible terrorist attack overnight, and everybody and their brother panics and decides to sell their positions as soon as the market opens. A massive wave of sell orders hits your broker’s site, crashing it. Those same sell orders are driving prices down, causing more people to sell, sending the market into a free fall.
And this is the time when you need to get out of your position most, but can’t. Believe me, it sucks.
But it doesn’t have to be something so dramatic for problems to arise. For example, brokers often roll new code or system upgrades overnight, and although they test the best they can to make sure everything is stable, sometimes an issue will not show up until the rush of opening orders hits their servers the next morning.
However, broker issues are not the only things that can cut off your ability to trade, so if you want to do everything you can to try to survive when the shit hits the fan, I suggest you consider the following:
In our modern world, especially if you live in major urban centers, we rarely give a thought to losing power, yet it still happens. Just a couple of weeks ago, a major part of San Diego County lost power for several hours. No matter if it is a line worker who hits the wrong switch or a fuse blows out in your home or office, there is always the risk of an unexpected power outage.
So check out Best Buy or Amazon and get yourself a UPS battery backup unit. You don’t need the one that will power your whole house; you just need one that can give you 15-30 minutes of battery backup.
Once you get it, make sure you plug your CPU, your internet modem, your wireless router, and at least one monitor into the battery backup plugs. This will enable you to stay up and running and give you enough time to flatten out a position or at least put a stop order in if you lose power.
Even with no broker issues and full power, your internet connection can go down, leaving you at the mercy of the markets. If you have access to a fiber optic service like Verizon’s Fios you should seriously look into signing up. It is extremely fast and has almost zero downtime.
But no matter what type of internet access you have, you should definitely have redundancy in the form of a separate provider.
Don’t be penny wise and pound foolish; just pay the extra fifty bucks a month to have a backup connection. Even if you never need to use it, it’s great piece of mind to know that if your DSL goes out; you can just switch CAT 5 cables and have your cable internet kick right back in. (It should go without saying that you should have the CAT 5 cable to your alternate service clipped to the back of your router or computer for a quick switch over).
Online trading is so frictionless that there’s no reason to have all your trading funds with one broker. Split your funds 50/50 or 30/70 between your primary broker and a secondary broker. Then, unless there is a complete failure on the exchange system itself, something which is almost unheard of – and if it happens, you’re screwed either way – you’ll have an alternative to flatten your positions out.
Say you are long 500 shares of XYZ and you lose access to your broker’s platform. If the market starts to tank, you can go to your secondary brokerage account and sell 500 shares of XYZ short, effectively making you flat on the position, which you can unwind when things return back to normal. Sure you will pay a couple extra commissions, but what does that matter if it saved you hundreds or thousands?
If your internet connection goes down and it’s not an exchange problem, you still should be able to close a position out on your broker’s mobile app, possibly even if they are having problems with their desktop platform. The point is, make sure your brokerage app is download and your phone is close to your trading desk.
If you ever happen to fat finger a trade, over buying or selling a position, close it out immediately. If you are a trader, you have to analyze situations fast, and then take quick, non-emotional actions, and this is a perfect example of when you need to do that.
Even if you think the mistake was caused by a broker’s trading platform, close the position first, investigate later. Here’s why.
How long will it take you to pick up the phone, get through to your broker’s customer service department, have them contact their order desk, and then the exchange? Do you want an open, oversized position out there for all that time, possibly going against you hard, only to find out that the broker/exchange won’t break the trade?
Trust me, kill the trade immediately, then call your broker’s customer support line and explain the situation. If you are a good customer, and the loss is not too big, you have a decent chance of having them break the trade or at least giving you some free trades to compensate. Or a toaster.