Legal Concepts in Investment Trading

Legal Concepts in Investment Firm Trading

• Express Actual Authority: Clear, explicit grant of authority to perform a specific task. This authority is explicitly stated, often in writing, and only covers the precise tasks described. A mistake made outside the authorized scope would likely not be covered by express actual authority.

• Implied Actual Authority: Authority that is not expressly stated but is reasonably inferred from the position and the circumstances. This concept could potentially be relevant if an action was deemed reasonable in the context of the trader's role. However, a large trading loss would be difficult to argue as conforming to the implied scope of trading.

• Apparent Authority: Authority that a third party reasonably believes an agent possesses, even if the agent does not actually hold such authority. This is the most relevant concept for a large trading loss. If a third party (e.g., a counterparty in a transaction) reasonably believed a trader had the authority to make a trade, the firm could be held liable, even if the trader acted outside the true scope of their authority. This is the most likely scenario to result in a cost for an error to the firm.

• Estoppel: The legal principle that prevents a party from taking a position that is inconsistent with a previous representation or conduct. While likely to be relevant in some circumstances, this would not be the primary concept for the immediate problem with a trader's error since the focus is on the scope of authority.

• Crucial Point: If the trader's action was a significant mistake, placing the problem on a particular legal approach is critical. Limiting trading authorization to trusted personnel is a vital safety measure, and clear written guidelines for their authority are essential preventative measures to mitigate liability.