glenn

Forex Magnates spoke with GAIN Capital’s CEO, Glenn Stevens, for his in-depth perspective on the firm’s handling of the CHF volatility and the various Risk Management safeguards in place that ultimately prevented utter bedlam. His interview can be read in full below.

1. How would you describe the aftermath of the Swiss National Banks decision in a nutshell?

For us the event was not one of a very large negative impact, so we really did not have the financial impact that some of our peers did. I think the event will cause a lot of companies to totally change the way they are doing business. Whether or not some peers will survive in the long run, depends on who you are talking about.

For GAIN, a lot of work we had done 6-9 months prior to the Swiss franc debacle ultimately paid off in a positive fashion and now the important part is to say how this impacts the company moving forward. We laid out a roadmap going into 2015 for actions, products, etc. and all of these come into question now that the landscape has changed so much.

2. GAIN Capital was one of the first companies to increase margin requirements in CHF pairs, what prompted this decision? Does it have anything to do with exposure and retail traders going heavily short the CHF?

The first part of my answer will sound a little cliché, but its part of the backdrop and differentiation that aren’t obvious when first looking at the company. At first glance you cannot underscore the experience in the FX markets from myself and our risk head and the head of our institutional business as just three guys who have 90 years of experience in FX.

It's unprecedented by the Swiss National Bank (SNB) by some of the impact it’s having, but the central bank’s snap impact on market participants is not unprecedented. It’s actually happened many times before – we saw it with the SNB in 2011 and with the BoJ in 2013.

Many of our peers do not have this time in FX, and come from different industries. Experience shows up when you need it, when you don't need it, it sounds like marketing material and it sounds like “well that's nice, but what does it mean.”

Last summer when we saw more and more customers put on these positions – one thing we did in a very accurate fashion was to blend risk management with our commercial policy. In other words, we don't just chase the market and say our regulator says we can provide 1% to 2% leverage, we have been analyzing the situation in real time.

We actually pay attention to our risk metrics every day as it looks at every customer and every position and we feel that more than aggregate market exposure is what percentage of our customers are participating in a single trade, and what percentage of our customers are interested in having a certain carry trade, position, etc.

Taking the information we got into account we evaluate what it means to market policy or potential exposure. For example, when we look at the Scottish vote in the UK, very few companies thought they should put different policies in place. One only does this after looking at data and overlaying it in the context of the situation as personal experience dictates.

It doesn't make it perfect, but it helps a broker with details about what should be done. We started to have these conversations last summer and more and more we started to consider the thought of, "this looks like a binary event that could end up tough."

We did not predict the SNB would do this or expect it to happen like anyone else did. But we obviously took action and we had three levers: i.e. an initial margin, which we moved up to 5%, a maintenance margin which we kept high and a carrying cost.

Some other parties got very aggressive in terms of providing leverage and attractive rollover rates.

Keeping in mind that if the SNB never made this move someone might say that we left some revenue on the table, because we could have attracted more customers, unfortunately they do not always take risk management into consideration.

This does have an impact on customers and industry. Now we are in a situation where regulators are overreacting. To sum up, we actually did very little after the SNB announcement, but a lot in the 9 months prior to it.

3. The repercussions on the industry are quite likely to be substantial. What do you think that the industry can do to try and rectify this situation and avoid the seemingly inevitable backlash currently facing brokers?

The backlash happens to sell well in the press when it becomes sensationalized and the industry deals with hundreds of millions of losses. Unfortunately, the collapse of recent companies has been a very public event, and was sizable enough for people to take notice of the situation.

The reality is a ten-car accident gets more attention than a one-car accident on the highway. Nobody realizes that the one-car accident may have been way more serious, but people do not look at the details.

When you read Wall Street Journal or Bloomberg articles that FX is an unsuitable product for the mass market, this is so uneducated and uninformed. Only a few players lost the majority of their funds in many instances.

If people are speculating with such large amounts of money then they have plenty of disposable income to take in similar investments such as real estate, stocks, etc. There’s a disconnect that the media is not doing their homework even though the information is available.

The repercussions of the Swiss National Bank decision aren’t concentrated in the thousands of customers, but in hundreds of customers. If you read a lot of this negative press, you would think that hundreds of thousands of customers were affected by this.

4. Could you provide us with a timeline as to how the events unfolded in the EUR/CHF at GAIN Capital?

For our timeline, which will overlap with the actual timeline, ours goes back to mid summer of 2014, when we started to notice that this trade was becoming more popular and we took some proactive steps to make the trade less attractive via our risk management strategies.

It wasn't a loss for the customer and a potential commercial loss for GAIN Capital, but we felt like it was the right thing to do for both parties. While other companies have seen a ballooning of the interest with the CHF trade, they did not all make changes the way we did which protected us from a further rapid increase.

When the SNB came out with their commentary on the Monday before the event and reassured people that they would defend the floor with unlimited resources, people relied on it as a fact.

The reputation of the SNB as a pillar of strength was an easy way to fall into a trap thinking “I can’t lose money.” Those that followed along closely and many with experience in the foreign exchange market were less surprised that the 1.2000 floor removal happened.

Everyone was trading against the SNB and they couldn't bet against the whole world. This is where we start to see some cracks in the logic. At GAIN Capital, we didn't predict anything but we didn’t feel compelled to pack away from our more conservative stances described previously.

The SNB first came out with an interest rate change but they did not say in simultaneous fashion that they would not defend 1.20, the first thing that happened was that a fair amount of business appears to have transacted between 1.20 and, call it, 1.16.

Only then, on the follow-up when it became clear that the 1.20 would not be defended did you see the accelerated drop from 1.1650 to 0.8500. People keep making it sound like it was 1.20 to 1.000 but our experience from our institutional platform shows evidence that there was a fair amount of business between 1.20 and 1.16 transpiring before the collapse all the way down.

Some smaller firms are telling customers that there were no prices between 1.20 and the bottoming out around 1.000, but that does not appear to be the case in our view.

5. So most of the stop loss orders were executed above 1.1650?

Yes, we did execute stop losses below 1.20 and above 1.16. When you see CFTC Commissioner Bowen come out and say “this is the least regulated derivatives market in the U.S.” that’s just incorrect. Media and pundits are claiming many customers have been negatively impacted by the event, which is absolutely inaccurate. There were tens if not hundreds of millions of trades in the EUR/CHF which changed hands between 1.16 and 1.20.

6. How and why did you decide to compensate negative balances?

For us it wasn’t an easy decision, because we technically don’t advertise negative balance protection for our clients. It’s part of our approach for the long-term health of the industry. While we have been slower sometimes in making changes to our features, but instead of rushing we are trying to do it right. While it has been a challenging decision it's part of our investment in the longer term to send a message that this product can be suitable for the right person using the right brokers.

7. What do you think will be the repercussions on the regulatory approach towards FX?

On the one hand it is true that not all regulators are created equal. If you look at the FCA and the U.S. regulators, these are two very different approaches. On the one hand, you have a regulatory body which is looking at the business aspect and at the interests of the customers.

I’m concerned that initially there might be a reflux against the industry, we have seen it already with the U.S. regulator which came out with changes to margin requirements on a couple of currencies. That’s fine, but what would have been better is to get some input from companies and clients. This shouldn't be a matter of an executive committee decision, as is the case with the NFA.

There are no forex participants on the executive committee. If you took any time to look at the profile of losses at GAIN, Interactive Brokers or FXCM, you would come to the conclusion that there is a marginal group of people who decided to put this trade on (shorting CHF) and it didn’t work out.

How is the EUR/CHF event any different from the following?: A small group of traders on the equity side start backing up a biotech company which is supposed to get a new drug approved. The company announces that it is very likely to get this drug approved by the FDA and, in the end, a week before the regulatory decision the CEO of the firm comes out and voices his opinion that the drug is going to be approved.

The market gets even longer and people start leveraging up on the trade and next week the FDA comes out and says - the drug is put on hold due to side effects. The stock would collapse, but does this mean that people shouldn’t be trading stocks?

It was one stock and one currency pair, it makes no difference - extraordinary market conditions will always be around.

There is plenty of Liquidity in the euro, the Japanese yen, the Aussie, the Canadian dollar or the British pound. There has been no contagion across other currency pairs.

It was easy for the Wall Street Journal, the Financial Times and Bloomberg Markets to get out there and say how risky or outright bad the forex market is.

In the short-term I am worried that some uninformed, knee-jerk decisions will be made that are harder to undo over time. There should be a diligent analysis and some feedback should be collected in order for educated decisions to be made.

Lastly, the futures industry has been treated the same way - a good chunk of the money lost on the Swiss franc trade was in futures for currencies.

8. What do you think about companies going after client negative balances?

Interactive Brokers' CEO said that many of the clients of the company are in jurisdictions where we have little to no chance of recovering the funds - Hong Kong, Spain, Middle East.

The costs associated with collecting the funds are also an issue. Requests for collection will be made, but at some point the aggravation, the cost and the complexity of this process will outstrip the benefit.

9. Why did some clients get good fills on their trades with some brokers and others didnt?

During extreme conditions it's the equipment that matters. Some brokers use one bank for liquidity, others’ systems can’t scale adequately during emergency. These are the times when only the equipped are prepared.

glenn

Forex Magnates spoke with GAIN Capital’s CEO, Glenn Stevens, for his in-depth perspective on the firm’s handling of the CHF volatility and the various Risk Management safeguards in place that ultimately prevented utter bedlam. His interview can be read in full below.

1. How would you describe the aftermath of the Swiss National Banks decision in a nutshell?

For us the event was not one of a very large negative impact, so we really did not have the financial impact that some of our peers did. I think the event will cause a lot of companies to totally change the way they are doing business. Whether or not some peers will survive in the long run, depends on who you are talking about.

For GAIN, a lot of work we had done 6-9 months prior to the Swiss franc debacle ultimately paid off in a positive fashion and now the important part is to say how this impacts the company moving forward. We laid out a roadmap going into 2015 for actions, products, etc. and all of these come into question now that the landscape has changed so much.

2. GAIN Capital was one of the first companies to increase margin requirements in CHF pairs, what prompted this decision? Does it have anything to do with exposure and retail traders going heavily short the CHF?

The first part of my answer will sound a little cliché, but its part of the backdrop and differentiation that aren’t obvious when first looking at the company. At first glance you cannot underscore the experience in the FX markets from myself and our risk head and the head of our institutional business as just three guys who have 90 years of experience in FX.

It's unprecedented by the Swiss National Bank (SNB) by some of the impact it’s having, but the central bank’s snap impact on market participants is not unprecedented. It’s actually happened many times before – we saw it with the SNB in 2011 and with the BoJ in 2013.

Many of our peers do not have this time in FX, and come from different industries. Experience shows up when you need it, when you don't need it, it sounds like marketing material and it sounds like “well that's nice, but what does it mean.”

Last summer when we saw more and more customers put on these positions – one thing we did in a very accurate fashion was to blend risk management with our commercial policy. In other words, we don't just chase the market and say our regulator says we can provide 1% to 2% leverage, we have been analyzing the situation in real time.

We actually pay attention to our risk metrics every day as it looks at every customer and every position and we feel that more than aggregate market exposure is what percentage of our customers are participating in a single trade, and what percentage of our customers are interested in having a certain carry trade, position, etc.

Taking the information we got into account we evaluate what it means to market policy or potential exposure. For example, when we look at the Scottish vote in the UK, very few companies thought they should put different policies in place. One only does this after looking at data and overlaying it in the context of the situation as personal experience dictates.

It doesn't make it perfect, but it helps a broker with details about what should be done. We started to have these conversations last summer and more and more we started to consider the thought of, "this looks like a binary event that could end up tough."

We did not predict the SNB would do this or expect it to happen like anyone else did. But we obviously took action and we had three levers: i.e. an initial margin, which we moved up to 5%, a maintenance margin which we kept high and a carrying cost.

Some other parties got very aggressive in terms of providing leverage and attractive rollover rates.

Keeping in mind that if the SNB never made this move someone might say that we left some revenue on the table, because we could have attracted more customers, unfortunately they do not always take risk management into consideration.

This does have an impact on customers and industry. Now we are in a situation where regulators are overreacting. To sum up, we actually did very little after the SNB announcement, but a lot in the 9 months prior to it.

3. The repercussions on the industry are quite likely to be substantial. What do you think that the industry can do to try and rectify this situation and avoid the seemingly inevitable backlash currently facing brokers?

The backlash happens to sell well in the press when it becomes sensationalized and the industry deals with hundreds of millions of losses. Unfortunately, the collapse of recent companies has been a very public event, and was sizable enough for people to take notice of the situation.

The reality is a ten-car accident gets more attention than a one-car accident on the highway. Nobody realizes that the one-car accident may have been way more serious, but people do not look at the details.

When you read Wall Street Journal or Bloomberg articles that FX is an unsuitable product for the mass market, this is so uneducated and uninformed. Only a few players lost the majority of their funds in many instances.

If people are speculating with such large amounts of money then they have plenty of disposable income to take in similar investments such as real estate, stocks, etc. There’s a disconnect that the media is not doing their homework even though the information is available.

The repercussions of the Swiss National Bank decision aren’t concentrated in the thousands of customers, but in hundreds of customers. If you read a lot of this negative press, you would think that hundreds of thousands of customers were affected by this.

4. Could you provide us with a timeline as to how the events unfolded in the EUR/CHF at GAIN Capital?

For our timeline, which will overlap with the actual timeline, ours goes back to mid summer of 2014, when we started to notice that this trade was becoming more popular and we took some proactive steps to make the trade less attractive via our risk management strategies.

It wasn't a loss for the customer and a potential commercial loss for GAIN Capital, but we felt like it was the right thing to do for both parties. While other companies have seen a ballooning of the interest with the CHF trade, they did not all make changes the way we did which protected us from a further rapid increase.

When the SNB came out with their commentary on the Monday before the event and reassured people that they would defend the floor with unlimited resources, people relied on it as a fact.

The reputation of the SNB as a pillar of strength was an easy way to fall into a trap thinking “I can’t lose money.” Those that followed along closely and many with experience in the foreign exchange market were less surprised that the 1.2000 floor removal happened.

Everyone was trading against the SNB and they couldn't bet against the whole world. This is where we start to see some cracks in the logic. At GAIN Capital, we didn't predict anything but we didn’t feel compelled to pack away from our more conservative stances described previously.

The SNB first came out with an interest rate change but they did not say in simultaneous fashion that they would not defend 1.20, the first thing that happened was that a fair amount of business appears to have transacted between 1.20 and, call it, 1.16.

Only then, on the follow-up when it became clear that the 1.20 would not be defended did you see the accelerated drop from 1.1650 to 0.8500. People keep making it sound like it was 1.20 to 1.000 but our experience from our institutional platform shows evidence that there was a fair amount of business between 1.20 and 1.16 transpiring before the collapse all the way down.

Some smaller firms are telling customers that there were no prices between 1.20 and the bottoming out around 1.000, but that does not appear to be the case in our view.

5. So most of the stop loss orders were executed above 1.1650?

Yes, we did execute stop losses below 1.20 and above 1.16. When you see CFTC Commissioner Bowen come out and say “this is the least regulated derivatives market in the U.S.” that’s just incorrect. Media and pundits are claiming many customers have been negatively impacted by the event, which is absolutely inaccurate. There were tens if not hundreds of millions of trades in the EUR/CHF which changed hands between 1.16 and 1.20.

6. How and why did you decide to compensate negative balances?

For us it wasn’t an easy decision, because we technically don’t advertise negative balance protection for our clients. It’s part of our approach for the long-term health of the industry. While we have been slower sometimes in making changes to our features, but instead of rushing we are trying to do it right. While it has been a challenging decision it's part of our investment in the longer term to send a message that this product can be suitable for the right person using the right brokers.

7. What do you think will be the repercussions on the regulatory approach towards FX?

On the one hand it is true that not all regulators are created equal. If you look at the FCA and the U.S. regulators, these are two very different approaches. On the one hand, you have a regulatory body which is looking at the business aspect and at the interests of the customers.

I’m concerned that initially there might be a reflux against the industry, we have seen it already with the U.S. regulator which came out with changes to margin requirements on a couple of currencies. That’s fine, but what would have been better is to get some input from companies and clients. This shouldn't be a matter of an executive committee decision, as is the case with the NFA.

There are no forex participants on the executive committee. If you took any time to look at the profile of losses at GAIN, Interactive Brokers or FXCM, you would come to the conclusion that there is a marginal group of people who decided to put this trade on (shorting CHF) and it didn’t work out.

How is the EUR/CHF event any different from the following?: A small group of traders on the equity side start backing up a biotech company which is supposed to get a new drug approved. The company announces that it is very likely to get this drug approved by the FDA and, in the end, a week before the regulatory decision the CEO of the firm comes out and voices his opinion that the drug is going to be approved.

The market gets even longer and people start leveraging up on the trade and next week the FDA comes out and says - the drug is put on hold due to side effects. The stock would collapse, but does this mean that people shouldn’t be trading stocks?

It was one stock and one currency pair, it makes no difference - extraordinary market conditions will always be around.

There is plenty of Liquidity in the euro, the Japanese yen, the Aussie, the Canadian dollar or the British pound. There has been no contagion across other currency pairs.

It was easy for the Wall Street Journal, the Financial Times and Bloomberg Markets to get out there and say how risky or outright bad the forex market is.

In the short-term I am worried that some uninformed, knee-jerk decisions will be made that are harder to undo over time. There should be a diligent analysis and some feedback should be collected in order for educated decisions to be made.

Lastly, the futures industry has been treated the same way - a good chunk of the money lost on the Swiss franc trade was in futures for currencies.

8. What do you think about companies going after client negative balances?

Interactive Brokers' CEO said that many of the clients of the company are in jurisdictions where we have little to no chance of recovering the funds - Hong Kong, Spain, Middle East.

The costs associated with collecting the funds are also an issue. Requests for collection will be made, but at some point the aggravation, the cost and the complexity of this process will outstrip the benefit.

9. Why did some clients get good fills on their trades with some brokers and others didnt?

During extreme conditions it's the equipment that matters. Some brokers use one bank for liquidity, others’ systems can’t scale adequately during emergency. These are the times when only the equipped are prepared.