This article was written by Meir Velenski, CEO of Velenski Financial Group.
Few retail traders have the knowledge or experience to trade in a fast market. We can define a fast market as one that moves at a much brisker pace than normal, driven in part by a specific catalyst. More specifically, a fast market is typically associated with a correction or an aggressive sell off in equity or FX markets.
In particular, this type of market condition occurs on the back end of a significant economic or political news development – additionally, a macroeconomic or episodic event such as a serious global terrorist attack like 9/11 can also help hasten markets.
Looking back to the peak of the global financial crisis in 2007-2008, markets were thrown into a state of disarray once it become clear that the global financial system was under severe threat, ultimately causing widespread panic. For example, AIG announced in NY back in 2008 that it would incur difficulties in meeting its liabilities, roiling equity markets into a steadfast free-fall.
Looking to the present and beyond, it is interesting to posit what would happen when another series of events, probably economic in nature, will shake the confidence of the market makers who are the major players. It can be quite difficult, to identify when a given market inverts from Bullish to Bearish as this can be a change that retail traders potentially will fail to recognize.
Likely, the first reaction will be to mark prices down, which is fine as a first step. However, spreads could face the biggest action, which could be exacerbated by an unknown outlook, or mixed signals. For example, evidence of a longer correction, uncertainty surrounding firms’ ability to meet their liabilities, or a Brexit style event could dramatically widen spreads.
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Should spreads be widened to any figure approaching 20-25 pips, trading platforms would likely freeze up. Such a freeze would occur due to volumes on the sell side or rather that a platform could not keep pace with the price changes and the feeds.
The retail market is fully controlled by the B-book operators as they are the ones with the retail traders. However, in the event of a turbulent market, these operators could resort to widening spreads, potentially not being able to answer the phones due to the volume of calls coming in as the platform will not accept trades. Ultimately, platforms are built to protect the CFD/FX firm not to protect the trader.
In the event of any large pricing actions, all non-guaranteed stops will not be honored and the CFD or FX firm price lead will be moving the price so fast that any online quote or phone quote will fail as the price will not be there once it’s quoted. Many brokers dealt with these types of issues in 2015 with the Swiss National Bank (SNB) convulsing currency markets.
A common term deployed by sales traders at CFD and FX firms will be to give a quote then state “off that” as the price has moved. Unfortunately, this as well as other reasons is why retail traders do not have the tools to trade in a fast market. Furthermore, traders will have no one that will answer the calls at the CFD firm.
In such a situation, retail traders will need to be prepared to watch the prices jumping and gapping at 30/40 pips a time – truly a difficult feat even for the most seasoned trader. Rather, its far more likely that retail traders will lose money as the margin level requirement built into the platform is set to ensure that the B-book CFD and FX firms do not lose money. Also traders are vulnerable to descending into a negative balance, which was the case with the SNB crisis.
Retail trading countermeasures
With these risks in mind it is important for retail trader to seek out or opt for guaranteed stops – these stops are offered by CFD and FX operators that will ensure that a given stop is honored. Moreover, in the event of a fast or turbulent market, retail traders would be well served to contact the provider and ask them to email the client on the firms’ position.
Even before any market chaos ensues, it is also advised that retail traders take as many telephone numbers as possible of the dealing desk to be prepared. Beyond that, a fast market can be hazardous to everyone, market operators and traders included.