If a "no advice" discount broker is a member of a major stock exchange, does that typically obligate the broker to accept client orders for all stocks, ETFs, etc. listed on the exchange? Or, is a broker completely free to restrict the set of listed securities that its clients can buy and sell?

By completely free, I mean to ask whether a broker can ban trades for a listed issue for whatever reason the broker wants — i.e. at their absolute discretion, and for their own selfish reasons. I know there are times when exchanges and regulators issue cease-trade orders for stocks, but it's not these kinds of "unable to take your order" situations that I'm asking about.

Imagine that you called your broker and tried to place a buy order for an ETF issued by a reputable fund company. The ETF is listed on a major exchange, and your broker is a member of that exchange.

Your discount broker — among the largest around, and part of a huge financial conglomerate — advertises broad market access. The broker's literature describes the diversification and liquidity benefits of ETFs, the convenience of ETF trading during market hours, and ease of access to third-party ETFs. In Canada, your broker is a member of IIROC. Your broker's affilated U.S. operation is a member of FINRA.

And yet your broker says: "Sorry — we don't allow buy orders for that ETF."

When pressed for more information, you learn they simply decided to forbid buy orders for the ETF because it competes with a similar "in-house" fund offering. Yet, the in-house fund isn't an ETF, and is less attractive as an investment. But selling it is good for the bottom line of the broker's financial conglomerate parent, who also owns the issuer of the in-house fund, and stands to gain more from fees & spreads on your investment than a $10 commission for selling you the competitor's ETF.

In this situation, has the broker done anything wrong in restricting access to a competitor's ETF?

Is this merely a broken marketing promise, or might the broker be failing to uphold an obligation in terms of regulation they are subject to, or in terms of some kind of reasonably expected responsibility to their clients?

I'm interested in answers with repect to both the U.S. and Canada, being the two countries whose stock markets I have ready access to and often trade in.

  • Are you asking for broad information about brokers denying trades or are you asking for specific information about your imaginary situation? An edit to the question to clarify would help, either focus on the broad question or narrowly on the specific hypothetical. – Freiheit Apr 30 '18 at 22:08
  • A casual search turns up at least one popular ETF that indicates that they do not always have the ability to be bought or sold through other brokerages: investopedia.com/ask/answers/102815/… – Freiheit Apr 30 '18 at 22:10
  • @Freiheit It's not a hypothetical situation for me, unfortunately. I'm interested to know if regulations have anything to say about a broker restricting client access to some listed issues on a public exchange, when the restriction is to promote the broker's own non-listed financial products. – Chris W. Rea May 1 '18 at 2:20
  • Assuming the fund you were after would be allowed to be sold by another broker (as per Freiheit's point), did your broker's Ts&Cs (which you will have read before signing-up) indicate that they may decline to trade in certain instruments for arbitrary or commercial reasons? – TripeHound May 1 '18 at 7:10
  • 1
    In the US, brokers are obligated to operate in good faith and follow the directives of an investor. "Failure To Execute" can create liability. Brokers can refuse to participate in certain markets (options, futures, crypto, etc.) but it doesn't sound kosher to be refusing to execute an ETF trade, assuming it's not something like shorting an exotic 3X leveraged VIX ETN with margin issues. If you want clarity, contact FINRA (U.S.). – Bob Baerker May 1 '18 at 11:31

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Browse other questions tagged or ask your own question.