Do Market Crashes Drive FINRA Claims? A Data-Driven Analysis

Everyone knows the story: markets crash, investors lose money, lawsuits and arbitrations follow. It's such an obvious narrative that it's rarely questioned. Compliance officers brace for arbitration surges after market downturns. Journalists write about the "inevitable wave" of investor claims. Securities attorneys prepare for busy quarters after volatility spikes.

But how much of this is actually true? And more importantly, what's the actual magnitude of market-driven filing increases?

In our first post, we documented massive filing spikes in 2020 and 2023. In our second post, we revealed those spikes were driven by regulatory changes to expungement rules and fees, not market conditions.

Now, in this final post of our series, we'll test the conventional wisdom rigorously: Do market crashes drive customer arbitration claims? We analyzed eight years of FINRA data (2016-2023) across four major market disruptions: the 2018 correction (-14.3%), the COVID crash (2020, -19.6%), the bear market (2022, -16.4%), and the banking crisis (2023).

The verdict: Market crash effects on customer filings are so small and inconsistent that they're only detectable when you specifically analyze 3-4 quarter lag windows and compare against pre-crash baselines. Even then, only 2 of 4 crashes show increases—and those increases amount to just 20-30 extra cases per quarter, lasting 1-2 quarters. Compare that to regulatory changes, which produce immediate surges of 100-200+ cases per month (5-10x larger).

The Conventional Wisdom

The logic seems airtight:

1. Market crashes → investors lose money
2. Investors blame their brokers for losses
3. Unhappy investors file arbitration claims
4. Therefore: market crashes = arbitration surges

This narrative is so pervasive that it shapes industry planning. Firms staff up compliance teams before expected volatility. Arbitration services prepare for capacity surges. Industry publications warn of "incoming waves" of investor claims.

But when we looked at the actual filing data across eight years (2016-2023), the story becomes far more nuanced—and the effects far smaller than predicted.

The Evidence: 32 Quarters of Data

To reduce noise and see true trends, we analyzed customer filings and market performance by quarter rather than by month across 32 consecutive quarters (Q1 2016 - Q4 2023). This eight-year window captures four major market crashes and provides the statistical power to detect even small lagged effects.

Look at this chart carefully. The red line (S&P 500) shows dramatic quarterly swings—crashing -19.6% in Q1 2020 (COVID), dropping -16.4% in Q2 2022 (bear market), plunging -14.3% in Q4 2018 (correction), then recovering with double-digit gains.

But the navy line (customer filings)? It barely moves. Customer filings stay within a stable range of 52-150 cases per quarter across eight years, showing no obvious visual correlation with market crashes.

Testing for Delayed Effects

The chart above shows no obvious visual correlation between market crashes and customer filings. But the conventional wisdom doesn't predict immediate responses—it predicts lagged effects.

After all, investors don't immediately sue when markets drop. The process takes time:

• 1-2 months: Investors receive quarterly statements showing losses
• 2-4 months: Consultation with attorneys, gathering documentation
• 3-6 months: Case preparation, demand letters, negotiation attempts
• 6-12 months: Decision to file arbitration if settlement fails

This suggests we should look for filing spikes 3-4 quarters after major crashes, not in the crash quarter itself. To test this rigorously, we compare post-crash quarters to baseline averages (the 4 and 8 quarters preceding each crash). This is the only way to detect whether market crashes produce any meaningful filing increases.

Examining Four Major Market Crashes

Let's examine each major market disruption in our 8-year dataset, focusing on the 3-4 quarters after each crash compared to pre-crash baselines:

The 2018 Market Correction (Q4 2018)

Market Impact:

• Q4 2018: S&P 500 down -14.3% (worst quarter since 2008 financial crisis)
• Fed rate hikes and trade war fears dominated headlines
• This was the first major test in our dataset

Customer Filing Response (3-4 Quarters After Crash):

Key Finding: The 2018 correction shows no filing increase. Even 3-4 quarters after the market dip, where we'd expect to see effects, filings were at or below pre-crash baseline.

The COVID Crash (Q1 2020)

Market Impact:

• Q1 2020: S&P 500 down -19.6% (worst quarterly decline since 2008)
• Fastest crash in modern history—markets fell 34% peak-to-trough in 33 days
• Circuit breakers triggered multiple times

Customer Filing Response (3-4 Quarters After Crash):

Key Finding: The COVID crash shows sustained increases of 20-30 additional cases per quarter in Q2-Q4 2020, representing 16-35% above baseline. This is the clearest evidence of market effects driving filings in our dataset—but note the scale: we're talking about 20-30 extra cases per quarter, not hundreds, and filings return to baselines rapidly after this period.

The 2022 Bear Market (Q2 2022)

Market Impact:

• Q2 2022: S&P 500 down -16.4% (second worst quarter in our dataset)
• Part of sustained bear market: S&P 500 down 18% for full year 2022
• Three of four quarters showed declines
• Bond market crashed simultaneously (rare event)
• Inflation fears and Fed rate hikes dominated headlines

Customer Filing Response (3-4 Quarters After Crash):

Key Finding: The 2022 bear market shows a +24% increase (about 20 cases above the baseline) exactly 4 quarters after the crash in Q2 2023. However, quarters 1-3 after the crash showed no increase or were below baseline. The effect appears only in a narrow 1-quarter window, and again only represents about 20 additional cases for that quarter.

The 2023 Banking Crisis (Q1 2023)

Market Impact:

• March 10-13, 2023: Silicon Valley Bank collapsed (2nd largest bank failure in US history)
• March 12, 2023: Signature Bank seized by regulators
• March 19, 2023: Credit Suisse emergency takeover by UBS
• Regional banking panic and contagion fears
• Interestingly, S&P 500 still gained +7.0% for Q1 2023 overall

Customer Filing Response (Partial Lag Analysis - Dataset Ends Q4 2023):

Key Finding: Q2 2023 shows a modest +19% increase (about 16 cases above baseline), but that increase evaporates in one quarter, and is more than offset by below average filings in Q4 2023. This is exactly the opposite of what the hypothesis would predict. Notes, as FINRA filings are not published, only the awards, we have to wait a bit longer before we can be confident we have 100% of the data from Q1 2024.

What Really Drives Filing Patterns?

Our analysis reveals a more nuanced picture than the simple "market crashes = arbitration surges" narrative:

Market Crashes: Modest, Delayed Effects

The data shows:

• Market crashes can produce modest filing increases (20-30 extra cases/quarter)
• These increases appear 3-4 quarters after the crash, not immediately
• The effect is inconsistent—not all crashes produce increases
• The magnitude is far smaller than industry folklore suggests

Why the delay? The arbitration filing process naturally takes time:

1. Investors receive quarterly statements (1-2 months)
2. Consultation with attorneys and documentation gathering (2-4 months)
3. Case preparation and settlement negotiations (3-6 months)
4. Filing decision (6-12 months total)

Why so modest? Several factors limit customer filing surges even after crashes:

1. Losses aren't enough - Customers need to prove broker misconduct, not just losses. Market-wide crashes make it harder to blame individual brokers for universal declines.

2. Recovery dampens claims - Markets often recover significantly within 6-12 months (the typical prep time). The COVID crash recovered to new highs within 6 months, reducing investor anger.

3. Expungement dominates - Even during normal periods, expungement cases (brokers seeking to clear records) outnumber customer claims 2:1 or more, making regulatory changes the dominant driver of total filing volumes.

The Real Spike Drivers: Regulatory Changes

While market crashes may add 20-30 customer cases per quarter, regulatory changes add 100-200+ cases per month:

1. Fee increases (2020): 28x expungement fee hike drove 700+ filings in summer 2020
2. Procedural changes (2023): SEC approval of new expungement rules drove 667 filings before implementation
3. Deadline effects: Both regulatory changes produced immediate, massive spikes—far larger than any market-driven increase

The Bigger Picture

This analysis reveals something important about the scale and drivers of FINRA arbitration filing patterns:

The conventional wisdom isn't entirely wrong—it's just dramatically overstated.

Yes, major market crashes can produce modest increases in customer filings (20-30 extra cases per quarter) that appear 3-4 quarters after the crash. But this effect is:

• Inconsistent (only 2 of 3 crashes showed it)
• Delayed (takes 3-4 quarters to appear)
• Modest (20-30 cases, not hundreds)

Compare that to regulatory changes:

• Consistent (every major rule change produces spikes)
• Immediate (within weeks of SEC approval or before deadlines)
• Massive (100-200+ cases per month, not per quarter)

In summer 2020, brokers filed 700+ expungement cases because fees were increasing 28x—dwarfing any market-driven customer filing increase. In 2023, they filed 667 cases to beat procedural deadlines—again, far exceeding market-driven effects.

The lesson: Regulated market participants respond primarily to regulatory incentives, with market conditions playing a secondary role. Securities professionals are sophisticated actors who understand regulatory timelines and economic incentives. They don't panic-file based on market movements—they strategically time filings based on rule changes.

The conventional wisdom persists because it feels intuitive: markets crash → investors lose money → lawsuits follow. But the data shows this narrative vastly overstates market effects while missing the dominant driver: regulatory changes that create immediate, powerful incentives for action.

What's Next

This concludes our 3-part series on FINRA filing patterns:

• Part 1: When do filings spike? - Documented the 2020 and 2023 surges
• Part 2: What drove the surges? - Revealed regulatory causes (fees and procedures)
• Part 3 (this post): Do market crashes drive claims? - Debunked the conventional wisdom

Want to explore more arbitration data and trends? We'll continue analyzing FINRA arbitration patterns and sharing insights on this blog.

Our Methodology

Data Source: FINRA arbitration records.

Date Range: January 1, 2016 - December 31, 2023 (eight complete years, 32 quarters)

Aggregation Method: Monthly data aggregated into calendar quarters to reduce noise and identify true trends. Quarterly returns calculated by compounding monthly S&P 500 returns.

Lag Analysis Methodology: For each major crash, we calculated baseline averages from the 4 and 8 quarters preceding the crash, then compared filings in quarters 1-4 after the crash to these baselines. This isolates any market-driven effects from normal variation.

Market Events Analyzed:

• 2018 Market Correction: Q4 2018 (-14.3% decline)
• COVID Crash (2020): Q1 2020 (-19.6% decline)
• 2022 Bear Market: Q2 2022 (-16.4% decline)
• Banking Crisis (2023): Q1 2023 (banking failures, +7.0% market gain)

Classification Logic:

• Customer-initiated cases: Cases where at least one customer is filing a complaint as claimant
• Examples: "Customer vs. Member", "Customers vs. Member and Associated Person"
• Excludes cases where customers are respondents (e.g., "Member vs. Customer")

S&P 500 Data: Quarterly returns calculated from monthly closing prices, Q1 2016 - Q4 2023

Sample Size:

• Total cases analyzed: 8 years of FINRA data (2016-2023)
• Customer-initiated cases: 3,287 across 32 quarters
• Complete quarterly data: 32 quarters (Q1 2016 - Q4 2023)
• Average customer filings per quarter: 102.7
• Range: 52-150 cases per quarter
• Standard deviation: 22.4 cases per quarter

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All data accurate as of December 29, 2024. Filing counts and classifications based on FINRA's official arbitration records spanning 2016-2023.