One year ago the Forex world was rocked by the terrible SNB crisis when on January 15, 2015 the Swiss National Bank suddenly announced it was abandoning its currency’s peg to the Euro. The Swiss franc very quickly rose by almost 30% in value against most major currencies and for a period lasting about 45 minutes there was practically no liquidity in the currency, making it impossible to exit trades or indeed for most brokers to square their exposures. Stops were not honored, so all traders short CHF with leverage of more than about 3:1, which is quite low in Forex terms, had their accounts wiped out. Several brokers lost millions, with the most notable victim being FXCM, one of the largest and most reputable Forex brokers in the world. FXCM were seen as at risk of bankruptcy, which they avoided by taking several measures including a $300 million loan from Leucadia.
This SNB crisis is now regarded as the wildest and most dangerous incident in the modern Forex era. For a major global reserve currency such as the Swiss Franc to move in value by more than 25% in minutes during a period with practically no liquidity even from major banks was practically unthinkable. The nearest precedent is probably “Black Wednesday”: the day the British Pound was forced out of the Exchange Rate Mechanism in 1992 by George Soros’ Fund winning battle with the Bank of England over its peg to the German Deutschmark. However that was so long ago and occurred well before Forex became a retail market served by a plethora of retail Forex brokerages.
As its now been one year since this SNB crisis, we ask how this event has changed the behavior of Forex traders and Forex brokers.
Effect of SNB Crisis on Forex Traders
Most Forex traders were not personally hurt by the SNB crisis. However those that were long CHF in line with the prevailing long-term trend at the time were hit hard, with any leveraged by at least 4 to 1 wiped out completely. Some traders leveraged by greater amounts found themselves with negative balances, owing their brokers five or even six figure sums far well in excess of their deposits, if they had been generous with the amount of true leverage they were allowing themselves.
Of course, there were also traders that were short of the Swiss Franc, and found themselves with massive profits on the day of the SNB crisis, although they may have found that where take profit orders had already been given on the trade, the positive slippage they got from their brokers wasn’t as good as the negative slippage charged to the losing traders on the same trade by the same brokers!
Most traders were neither positively nor negatively personally affected, but most traders did take note and were influenced by the event in several ways.
1. There is more demand now for brokers explicitly offering negative balance protection, i.e. depositors are guaranteed they cannot lose more than they deposit whatever happens.
2. There is a greater awareness of the risk of trading currencies that are the object of a stated peg to another currency by its central bank, as the CHF was pegged to the Euro by the SNB.
3. Forex in general is seen as more risky, as compared to stocks and commodities major Forex rates generally fluctuate by significantly smaller amounts.
4. There is less trust in the SNB in the aftermath of the SNB crisis as just a few days before abandoning the peg they publicly stated they had no intention of doing so.
5. There is less trust in Forex brokers although it is also understood that most Forex brokers were quite blameless as it was actually their liquidity providers that pulled liquidity in most cases, and not the brokers themselves.
6. There is more fear of leverage, or at least a greater awareness of what using even moderately high leverage can do to a trading account when a sudden and unusually strong market event occurs.
Let’s now turn to how Forex brokers have been affected by the SNB crisis. It will be obvious that most of the effects on Forex brokers are just the other side of the impact on traders already listed previously.
Effect of SNB Crisis on Forex Brokers
It was assumed within minutes of the SNB crisis hitting that there was going to be financial chaos in the brokerage arena, which would result in a sizeable number of Forex brokerages being forced into bankruptcy or takeover. In fact, these predictions were wide of the mark, with only a few brokers ultimately being forced under. However FXCM’s share price dropped to under $1 as it became apparent that they required a huge loan with tough terms, although it now seems as though they have been able to weather the storm successfully.
One of the biggest ironies of the SNB crisis is that the “true” brokers with models based more upon passing on the best prices and less upon making a market were the brokers that were most exposed to losses. A result of this has been a somewhat greater popularity in market making, and we can see that FXCM is now offering a new “dealing desk” account type.
Traffic has gone two ways on the issue of offering customers negative balance protection. Several brokers that previously offered it have removed it from their terms and conditions (notably FXCM). However there are a few brokers that previously offered who decided to continue with it and are using it as marketing point to assuage traders of their worst fears. Of course, many brokers found themselves owed large negative balances by thousands of retail clients after the SNB crisis, and this debt was not much good on paper as the costs of pursuing the debts would probably have been greater than the total amount recouped. The savvier Forex traders became aware of this, calling the bluffs of Forex brokers that were writing to the owners of negative balances offering 50% off the bill for immediate settlement.
The issue of leverage gained a lot of traction, as the large negative balances that some retail traders found themselves owing came to be seen – justifiably in the case of very inexperienced traders offered huge amounts of leverage – as a result of leverage. Therefore there was a lot of talk about regulators placing severe restrictions on leverage that would effectively strangle the industry in the aftermath of the SNB crisis. This has not happened, but many brokerages have now reduced their maximum leverage offered, if not across the board than at least on more volatile and risky currencies.
Some pundits looked at these kinds of issues, saw the attention that was coming from regulators, and concluded that the model of retail Forex brokerage was going to become significantly more difficult, which would lead to a winnowing out across the industry. These fears now seem to have been unfounded, as the amount of money that remains to be made from retail Forex traders looks to be enough to warrant and hopefully offset all these risks.
