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Requotes, negative balances and trading risk

We received more questions regarding SNB’s announcement to discontinue 1.20 EURCHF peg so we decided to put up a Q&A here. More questions and answers may be added later.

Important note to readers: Please contact a lawyer if you need legal assistance. The information posted here is unqualified and may not be useful to you.

 

Questions and answers

One reader sends us her concerns following this Straits Times article ‘Forex firm tells S’pore client to pay up‘ published on 22 January 2015

MORE than 50 currency speculators in Singapore are being told to pay up potentially millions of dollars in losses, in the wake of Switzerland’s dramatic move last week to unpeg its currency, the franc.

A Danish retail foreign exchange trader operating here, Saxo Capital Markets, which is part of Saxo Bank, is said by sources to have issued demand letters to clients.

Lawyers told The Straits Times that one key issue is whether Saxo is entitled to requote prices or set different rates, and retrospectively apply those rates to concluded contracts.

Qn #1 – Are brokers allowed to re-quote the way Saxo Capital did, even after the trade has been concluded?

  1. Requote or not this is probably something between Saxo Capital and its clients defined by any service agreement signed at the point of account opening which customers’ lawyers should be going through right now.
  2. If it was not clearly defined, then someone may go to court and then it becomes something for our judiciary to determine.
  3. Traders may have better or worse terms as forex brokers do not operate the same way.
  4. Traders who are in the ‘Saxo’ predicament may want to watch the progress of another case. Alpari UK is one forex broker that famously became insolvent following SNB move. It was transferred under KPMG under special administration as part of its insolvency filing. This is what Forex Magnates reports:

 

Alpari UK Clients Will Be Required to Cover Negative Balances

The insolvent broker’s administrator has issued a F.A.Q document, stating that traders with negative balance “will be asked to pay that money”.

 

Qn #2 – Are you aware of how much AxiTrader was affected by this unexpected action by SNB?

  1. We are not qualified in any way to speak on their behalf but we do know that Axitrader sent a message via email to customers and posted in on the front page of their website as well.
  2. In addition, we know that a number was published here although we do not know how accurate it is.

 

Qn #3 – Did Axitrader re-quote their clients?

  1. We do not know. Please write to Axitrader to find out.

 

Qn #4 – Did Axitrader forgive negative client balances the way Oanda did?

  1. We do not know. Please write to Axitrader to find out.

 

Qn #5 – Do we have a agreement with broker to protect us from maximum stop loss?

  1. No. Axitrader only agreed on maximum spread.
  2. As of ALL brokers, a stop loss is like a limit order. Once that SL level is triggered, it will become a market order. It will be filled by a liquidity provider who can offer the best fill.
  3. For maximum stop loss, then you need one who agreed on guaranteed stop, where of course you need to pay a lot more money for guaranteed stop to happen.

 

Qns #6 – Do you have suggestion as a trader to minimise this risk?

  1. Do not use excessive leverage
  2. Make sure your trading account has sufficient capital i.e. plenty of ‘free margin’
  3. Make sure all trade positions are protected by stop loss orders because a bad fill is better than no fill
  4. Alternatively if this is an issue that keeps you up at night, use a broker that offers ‘guaranteed stop loss’ (the downside is wider spread and higher cost of trading)

 

Other information

  1. Saxo Capital is not the only forex broker operating in Singapore asking customers to make good negative balances.
  2. This incident caused by SNB is not unique. A source at a local broker informed me that Japan’s Fukushima tsunami created circumstances that caused the JPY to rally 12% in moments. Local traders were hit with huge losses as well.

 

Update 27 January 2015 – Email reply from Axitrader Compliance

Click to see enlarged version. Please DO NOT reshare this image.

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Director, TerraSeeds Market Technician Pte Ltd. Trader, investor. @sohtionghum was picked ‘Top 70 Forex Twitter in 2015’. Operates multiple strategies.

“Dear reader, I do not have a financial license to give advice. I do not know you the reader. Your financial objective and risk tolerance may be different from mine. I am not responsible for any consequence of your action.

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3 thoughts on “Requotes, negative balances and trading risk”

  1. Ivan LEONG says:

    this incident has given many an opportunities to see how brokers performed under duress situations. so, the question we should ask – what define a good broker?

    1. Ivan LEONG says:

      sorry for the typo error – should read as “an opportunity”

    2. Soh Tiong Hum says:

      ‘What defines a good broker?’
      Let me start the ball rolling with some sentences for everyone to ponder (don’t think too much, just choose only a or b each):
       
      1a. Good brokers don’t become insolvent overnight
      1b. Good brokers become insolvent overnight
       
      2a. Good brokers requote customers after orders were filled
      2b. Good brokers do not requote customers after orders were filled
       
      3a. Each individual looks after his own account so he doesn’t not end with negative equity
      3b. Each broker looks after all accounts so no client ends with negative equity
       
      4a. Good brokers prevent unnecessary forex slippage
      4b. Good brokers cannot prevent unnecessary forex slippage
       
      5a. Good brokers forgive negative client balances
      5b. Good brokers do not forgive negative client balances
       
      6a. Losses in negative client balances disappear after they are forgiven
      6b. Losses do not disappear, they have to be made good thru some other means
       
      7a. Good brokers raise price of service to all clients to offset losses of some
      7b. Good brokers absorb losses of clients

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