Traders might not be able to get redress for any forex slippage encountered this morning because of GBP’s flash crash but should investigate rigorously if they continue even after the dust has settled. Why?
Forex traders get hit by slippage
GBP flashed crashed this morning without apparent trigger. Although many GBP pairs have recovered most losses, the damage was already done. I did not have a position although my colleague Binni Ong was looking at GBPAUD and GBPCAD with her ‘The Alien Room’ community.
— TerraSeeds FX Tflow® (@terraseeds) October 5, 2016
— TerraSeeds FX Tflow® (@terraseeds) October 6, 2016
This is no time to celebrate however because some individuals wrote in to tell us they were on the wrong side of the trade and stopped out very far away incurring a huge loss. One individual tells us that he has incurred an additional 200 pip stop loss. Why? Did the broker make a mistake?
What is forex slippage
In my unqualified opinion, this is a classic forex slippage. It is unlikely to be a broker mistake since this GBP crash was a widely reported/talked about event and not confined to small segment. It is therefore highly unlikely for retail traders to get any redress. As the crash unfolded, there was no liquidity i.e. no bid from counterparties (liquidity providers that take the opposite of our trades). Since there was no bid, stop loss orders could not be filled. The next available bid could be 200 pips away resulting in an outsized slippage. Here was what I wrote in an earlier post ‘Forex slippage: How slippage happens and why you need a good broker‘
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.
Reasons why slippage happens
- 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 are dealing with brokers with very few liquidity providers (this happens when you are trading with a market-maker)
One special event that forex traders ought to remember was last year’s SNB-CHF fiasco. The Swiss National Bank announced they would de-peg the CHF from EUR something which was in place since 2011.
- SNB had communicated that they would defend this peg rigorously.
- The day it happened there was no scheduled event involving the Swiss National Bank. Even forex traders who follow calendar events rigorously would not suspect that the SNB would be making any announcement.
- IMF Chief Christine Lagarde famously claimed that she was surprised.
- Liquidity was poor enough that various FX platforms ‘froze’ and then ‘gapped’ away.
What my broker Axitrader said was this
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.
If you look at the reasons for a forex slippage to happen you can see that many elements were present in today’s flash crash. At the time of the crash which was 7am this morning Singapore time (GMT +8), this was the time after the US closed but before Japan open. It’s Asian time and usually the quieter part of the day. In addition, the heavy weight news today is the NFP tonight and then several FOMC members to speak but probably no one was expecting anything from the UK side.
There are now rumours that
- a forex broker is going to get hit again (just like last year)
- that brokers are not going to honour GBP trades
- tonight’s NFP results was leaked leading to front running
Forex price feeds go haywire
Frankly this rumour mill is getting absurd. Real or not, I guess rumours add spice to otherwise mostly sedentary kind of activity level that most traders go through. There is something else more important to note though – I think that because of the flash crash, price feeds on different platforms have gone cuckoo.
This kind of slippage you have to investigate rigorously
Take a look at the two platforms below. Traders do have to pay more attention to this difference in price feed and I think it comes back to the slippage again. Encountering that forex slippage during the flash crash might be a global phenomenon that you won’t get redress but now that the dust should have settled, anyone who encounters slippage again should check the price on your own platform against other platforms. If you are hit with a slippage because of a price that looks very different from others (especially if they look the same), then this is a matter you must pursue.
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.