The latest broker to feel the effects of Swiss National Bank‘s announcement to remove the cap on the Swiss Franc is Liquid Markets out of London, UK.
The SNB decision to stop supporting a cap in the value of the CHF against the Euro which they had done for more than 3 years caused the CHF (Swiss Franc) to suddenly soar in value and has left many Forex brokers to deal with the impact. Like several brokers before them, Liquid Markets has had no choice but to inform their clients that they will no longer be able to handle their accounts.
According to Adam Lemon, Chief Analyst at Daily Forex, there are several reasons why some brokers have had no recourse but to close their doors and inform their clients that they have incurred considerable financial losses.
The Forex market is a highly liquid one. This means that traders can place tight stop losses and trade with high margin, knowing that if their stop loss is hit, they will usually not have to pay any slippage. The SNB action was so quick that the price passed almost every stop loss without stopping. Traders and brokers were not able to execute any trade exits until the price of all CHF pairs had moved by far more than 1,000 pips.
There are many brokers that hedge their clients’ trades in the real market, and in this case, they experienced the same problems as their own clients did and could not pass on their clients’ losses.
The second reason why some brokers are choosing to go into insolvency is that traders that were long CHF would have made a lot of money with the SNB announcement but the balance of these trades would not have been covered by the losses incurred by the losers whose account balances had gone into negative. This put pressure on the brokers to have to come up with the money, which they didn’t have. From the trader’s point of view, they could end up owing their broker more than they originally deposited.
Most brokers, such as FXCM (FXCM), state that they will never pursue a client for a negative balance, as they consider it to be a fault of their own risk management procedures. They are willing to ‘forgive’ these debts.
