Forex Pricing Error and Negative Balance: Court of Cassation Ruling

Ten minutes past midnight, USD/CHF quotes from a price provider start to break down. On the screen the bid price has dropped below the ask price; a picture that is impossible in a normal market and lasts for hours. An investor trading with about 9,000 dollars of margin takes the account to 1.9 million dollars by morning with 117 currency pair trades. When the brokerage notices the error, it cancels the trades retroactively; this time the account falls to minus 24,140.26 dollars. Should a gain arising from an erroneous price be protected? And if not, can the investor be left in a worse position than before the error?

In its decision of 30 March 2022, Docket No. E.2020/5562, Decision No. K.2022/2600, the 11th Civil Chamber of the Court of Cassation separated these two questions. The Chamber rejected the appeal objections aimed at the regional court of appeal's assessment on cancelling the gain produced by the erroneous price; however, it found it contrary to fairness that the account was closed with a negative balance as a result of the cancellations, and reversed the decision in favour of the claimant, by majority. According to the Chamber, the judgment must be structured so as to protect the balance of plus 8,925.72 USD that existed before the erroneous trades began.

🌙 A one-night price error and 117 trades

The claimant signed a Leveraged Trading Framework Agreement with the defendant brokerage on 29 August 2011 and opened an account on the firm's currency pair trading platform. According to the defendant, the prices on the platform come from ten information providers. On 31 May 2013, between 00:10 and 10:58, the pair code coming from one of the information providers began to be received erroneously and the USD/CHF price was displayed wrongly.

According to the findings of the regional court of appeal, in this time window the claimant began trading on the erroneous pair with about 9,000 USD of margin and, after roughly 8 hours, made a profit of 1,840,000 USD by buying and selling. In that period a total of 117 USD/CHF trades were made and the trade size was gradually increased. The claimant, for his part, argued that when he left the system at 06:59 in the morning his balance was 1,916,009.52 USD, and that the balance was brought down to -24,140.26 USD by reverse trades made without the defendant's consent or knowledge.

The parties agreed that the brokerage was given an administrative fine by SPK for failing to notify after the order cancellation; the defendant argued that SPK saw no fault in the cancellation itself. The claimant first filed a partial claim for 20,000 TL and, with an amended claim (ıslah) dated 29 June 2017, raised the demand to 2,022,613.71 USD.

⚖️ Two courts, two opposite results

The Hatay 1st Civil Court of First Instance (1 June 2018, E.2014/146, K.2018/199) upheld the claim. According to the court, the platform either had no control module to monitor market data or it was not working effectively; yet SPK legislation placed on the brokerage an obligation to set up adequate technical equipment and an internal control system. The court did not consider the trade a hedging trade that could be cancelled; it awarded 2,022,613.71 USD, adding 87,303.97 USD interest to the 1,935,309.74 USD loss.

The Adana Regional Court of Appeal, 9th Civil Chamber (25 December 2019, E.2018/1592, K.2019/1459), on the other hand, set aside the first instance judgment and dismissed the claim. The main links of its reasoning are as follows:

🔍 Court of Cassation: no gain, but no negative balance either

The 11th Civil Chamber of the Court of Cassation built its decision on two points. In the first, it stated that there was no aspect of the regional court of appeal's decision on the merits that conflicted with the legal rules applicable to the dispute, and the claimant's other appeal objections, apart from the second point, were rejected. The claim for the 1.8 million dollar gain was therefore not accepted.

The second point changed the fate of the case. The Chamber drew attention to the supplementary expert report of June 2017: the defendant company had corrected the trades using the correct rates, but the cancellations were not limited to USD/CHF; trades in GBP/USD, USD/JPY, EUR/USD, EUR/TRY and USD/CAD were also cancelled. As a result of these cancellations, most of which ended in losses, the account fell to -24,140.26 USD as of 19:53 on 31 May 2013. Yet the claimant's balance before he began trading was +8,925.72 USD.

At this point the Chamber struck the following balance: no result in the claimant's favour arises from trades he made relying on the erroneous data feed on the screen; but closing the account with a negative balance, in a way that places him at a disadvantage, is also not consistent with fairness. Dismissing the claim altogether was therefore not considered correct; the decision was reversed in favour of the claimant, the case was sent to the regional court of appeal under Article 373/2 of the Code of Civil Procedure (HMK), and a hearing attorney's fee of 3,815.00 TL was awarded in the claimant's favour.

🗣️ Dissenting opinion: the orders could not be cancelled

The decision was made by majority. According to the expert reports and the company record quoted in the dissenting opinion, the error arose from a technical fault in the process by which the price-providing bank obtained prices from one of its overseas providers; the information for the USD/CHF code began to change frequently and continuously from 00:10:43. When the bank noticed the error, it first cancelled the brokerage's hedge orders, and the brokerage then cancelled the clients' trades at the erroneous price without notifying the clients.

The member writing the dissent takes the view that the trade was a hedging trade, that it could not be cancelled, that the brokerage had no right or authority to cancel, and that the brokerage was fined because it also acted contrary to the SPK communiqués and the agreement during the cancellation. For this reason he did not join the affirmation of the dismissal reasoning based on Article 30 of the TBK and Article 2 of the TMK, and noted that the majority's finding of a negative balance as contrary to fairness amounts to accepting that the brokerage acted contrary to the communiqué and the agreement.

The dissent also recalls Article 115/3 of the TBK, which makes an agreement excluding liability for slight fault in professional services carried out under a permit absolutely void.

📜 Article 10 of the Communiqué and Article 6.3 of the agreement

Article 10 of Communiqué Series: V No: 125, in force on the date of the event and quoted verbatim in the dissent, sets the rule that executed client orders cannot be cancelled or amended by brokerages. The rule contains three exceptions:

Article 6.3 of the framework agreement between the parties contains a similar provision; it provides that where the counterparty cancels the hedging position, the client's order may be cancelled and that the client is informed in that case. In the later period, order cancellation was regulated in Article 29 of Communiqué III-37.1 on Principles Regarding Investment Services and Activities and Ancillary Services; a more recent assessment by the Chamber based on that provision in a similar dispute is discussed in our article on deletion of forex gainsTR.

Article 30 of the TBK provides that a party who falls into essential error when a contract is concluded is not bound by the contract. Article 35 of the TBK provides that a person at fault for the error must make good the loss arising from invalidity, but that no compensation can be claimed if the other party knew or should have known of the error. This article is not mentioned in the decision.

🔁 What happened in the case after the reversal?

The regional court of appeal followed the reversal and partly upheld the claim, ruling for collection of the Turkish lira equivalent of 8,925.72 USD on the day of actual payment, with interest running from the filing date of 11 February 2014 under Article 4/a of Law No. 3095, and dismissing the remainder of the claim. On the claimant's appeal against this decision, the 11th Civil Chamber of the Court of Cassation, in its decision of 8 May 2024, E.2023/1165, K.2024/3688, affirmed the decision unanimously, also taking into account the procedurally acquired right that had arisen in the other party's favour because the reversal had been followed. The case thus ended with the return of the balance from before the error.

🧭 Criteria drawn from the decision

💬 Frequently asked questions

For detailed information and legal support, you can contact Savun Law & Consultancy. Contact details are available on the contact page; other decision reviews on leveraged trading and brokerage disputes are in the Precedent DecisionsTR archive.