A lot of the coverage following Thursday’s Swiss National Bank removal of the price floor on the EUR/CHF exchange rate has been about the losses and troubles it caused to the forex industry. In an exclusive interview with Emanuel Kronitz, Founder of AvaTrade, he explained to Forex Magnates that we should focus on the positive and that perhaps the real story is that in such a ‘black swan’ event “the industry came out in really good shape.”
Below is a summary of our talk with Emanuel Kronitz.
Commenting first about their own performance, Kronitz stated that “they did fine” and more or less ended the day break even, with him describing it as “no different from any other day”. Kronitz attributed this to the fact that the broker didn’t have a large Swiss franc position among its client due to a diversity of customer trading patterns and geographical locations.
In relation to their analysis of what the SNB would have done prior to Thursday, Kronitz related that internally it was a situation they monitored, as he said, “It (coming SNB action) was out there, but no one really knew how the SNB would react. But it was clear that their actions would eventually come sooner or later – either naturally or because they would be compelled to finally act.” He expressed though that there is no hiding the fact that it was a black swan event. As such, he believed that brokers can analyze different scenarios but a black swan is called as such because you can never really predict if and when it will occur.
When asked about risk management advice and how brokers should game plan their risks, Kronitz answered that firms should focus on the known risks as he said, “You need to list your risks and know what different outcomes can occur.” He added that it was important first to “identify & mitigate the most obvious risks which are the day to day ones that occur and then to proactively manage more remote risks.” He explained further that being serious about risk management meant “having ongoing rigorous dynamic risk management discussions that take place all year round” and not just occasional meetings about risk and client exposure
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During our interview, Kronitz became animated when discussing the aftermath of Black Thursday. He explained that the story he felt no one was really talking about was that “the industry came out in really good shape,” which Kronitz described as “testament to the maturity of the industry that it survived as well as it did.” He conceded that there were casualties such as FXCM and Alpari but that their outcomes were more of an “exception to the rule.”
In relating his opinion, he compared it to the global financial banking crisis, the bankruptcies of Lehman Bros and others and losses to the big banks were much greater in relation to the results of the forex industry. He explained further that this was “an FX incident” and despite retail brokers being caught in the middle of it all, the “industry did well for surviving a black swan event.”
Regulation and Calls for Increased Margin
The conversation then moved onto the reality that the world is viewing the losses that took place and ultimately this could trigger regulators to act. On this, Kronitz believed that it would be a mistake for regulators to increase margin requirements. Alternatively, Kronitz stated, “Regulator focus should be on client funds and how they remained safe.” He added that existing regulation proved to be strong enough as through Black Thursday client assets had been safe among brokers who suffered losses. As such, because client assets were untouched, Kronitz didn’t believe regulators would act to create new guidelines to increase margin.
When asked about the variance of liquidity providers to stream consistent rates to the forex market, Kronitz explained that the event created a situation where “rates were all over the place and when you have a situation like that you inevitably will have institutions that try to take advantage of that.” At AvaTrade, Kronitz described that they reviewed the market and decided at 1.0450 for EUR/CHF executions on the gap was a fair rate. He added though, that for brokers sourcing rates it was important to “not put all of your eggs in one basket and work with a number of providers – because you never know when you will face such a situation.”
Kronitz concluded our conversation by emphasizing that he really believed that the industry came out strong. He explained that when it looked like there were going to be many brokers emerging from a difficult financial situation, they viewed it as an opportunity to grow their business through acquisition. Kronitz added, “AvaTrade is actively looking for opportunities to acquire brokers and client books but the industry in general has emerged from this crisis strong and in good shape.”