Can I have a bad fill for my stop loss after SNB announcement?
What traders encountered was a forex slippage
A reader sent an email today that asked this question.
Just wondering the recent SNB decision, will there be a scenario whereby the trade stop loss is not triggered and the account have a substantial loss?
Stop loss orders can be filled at worse levels if liquidity is not available. This is a forex slippage. SNB’s decision was so big liquidity providers disappeared. Traders’ accounts can have unexpected losses.
What is forex slippage?
As we discussed on this blog previously, this is what forex slippage is all about.
Slippage definition: A slippage happens when a limit order or stop loss is triggered at a worse price than the originally set price. Forex slippage is very frustrating and one reason for traders to encounter heavy unexpected losses. If you encounter slippage regularly during trading, you may have chosen a bad broker.
And these are some circumstances when forex slippages happen.
- time of low volatility (not too much liquidity or trading volume in certain timezone or certain period of time; low volatility usually happens during Asia trading zone or before market opens/closes)
- release of high impact news (e.g. FOMC meeting minutes)
- special event (e.g. 911 or Fukushima earthquake in Japan)
- or you have dealt with brokers with very few liquidity providers (most of time, this happens when you are trading with a market-maker)
Circumstances of SNB announcement-triggered slippage
1. Liquidity was poor enough that various FX platforms ‘froze’ and then gapped later because there were no quotes.
2. It was a high impact release. So high that even IMF Chief was caught in ‘a bit of a surprise’.
In fact, EURCHF was pegged since 2011 and the SNB did promise “utmost determination” so few foresaw a policy reversal.
The SNB will enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities.
Also the Swiss National Bank made 2 moves that day: removing 1.2 EURCHF currency peg and lowering interest rates at the same time.
3. Special event. It was not in any forex calendar so traders did not expect any news from SNB that day.
This is how I interpret the event as it unfolded
After the news exploded, liquidity for EURCHF disappeared because liquidity providers to forex brokers like banks did not offer any quotes. (All were in shock/scrambling to understand impact/looking for counter-parties?) This was also evident from the gap in the chart. Therefore brokers could not fill orders including existing stop losses. When quotes came back, they moved even further away so that if any order including stop loss could be filled, it was at a worse price than before. Depending on the level of slippage, traders encounter unexpected and substantial losses.
To put it in another way:
- Each time we place an order (including stop losses), a counter-party has to take the other side of the trade.
- Forex brokers do this by lining up liquidity providers like banks which will act as counter-parties.
- Stop loss orders we place are translated into a market orders which are filled when there is a match.
- In the SNB situation (very high impact), liquidity providers disappeared from the market because during uncertainty everyone is loathe to be counter-party to a trade whose risk is undefined yet.
- When liquidity providers finally come back with quotes, the prices they offered were even further away.
- The brokers were only able to match stop losses at worse levels because old levels were no longer available.
What our broker said was telling
There was a massive drop in CHF due to their central bank removing a floor in the market so no pricing was received for a time
In such an incident that was global in scale, good and bad brokers alike got hit with the slippage.