Exclusive: Japanese Brokers Face $8.6m Loss Due to January Flash Crash
- The massive spike in volatility on the first trading day of 2019 wreaked havoc across client books
Japanese STP brokers have not remained unscathed during the first trading day of the year in the country. During the early hours of January 3, before the Tokyo market opened, a massive flash crash across JPY currency pairs affected Japanese yen traders dramatically.
After flushing stop-loss orders, client losses across the board were significant. For Japanese STP brokers, however, which under the regulatory regime are not offering Negative Balance Negative Balance In its most basic form, a negative balance represents an account balance in which debits exceed credits. A negative balance indicates that the account holder owes money. A negative balance on a loan indicates that the loan has not been repaid in full, while a negative bank balance indicates that the account holder has overspent.In the retail brokerage space, this phenomenon occurs when a position’s losses in an account exceeds the available margin on hand from a given trader. When a trader place In its most basic form, a negative balance represents an account balance in which debits exceed credits. A negative balance indicates that the account holder owes money. A negative balance on a loan indicates that the loan has not been repaid in full, while a negative bank balance indicates that the account holder has overspent.In the retail brokerage space, this phenomenon occurs when a position’s losses in an account exceeds the available margin on hand from a given trader. When a trader place Read this Term protection, the sharp move caused the recurrence of a familiar pattern.
USDJPY 5M Chart
Just like after the SNB many brokers couldn’t chase their clients for the losses on their books, the January flash crash ultimately affected the companies too.
The magnitude of the event was not as pronounced as the Swiss franc spike in January 2015. Nevertheless, the total losses suffered by Japanese STP brokers on the first trading day in Tokyo this year totaled to about $8.6 million.
Flash Crash Event
The flash crash unfolded over about 10 minutes. Prices slipped during the most-illiquid time of the day, during the New Zealand trading session. Japanese yen crosses were the primary drivers for big moves across all major currency pairs.
As stop loss orders of clients got executed with significant Slippage Slippage In financial trading, slippage refers to the difference in price between the price an order was intended or expected to be filled and the actual price an order was filled. Slippage is a very contentious issue among retail traders, which can lead to issues. Many traders view levels of slippage at brokers as a key determinant for their business. For example, in forex trading, if a trader places a trade intending to enter a buy on the EUR/USD at 1.1080, but they only get into the market at a price In financial trading, slippage refers to the difference in price between the price an order was intended or expected to be filled and the actual price an order was filled. Slippage is a very contentious issue among retail traders, which can lead to issues. Many traders view levels of slippage at brokers as a key determinant for their business. For example, in forex trading, if a trader places a trade intending to enter a buy on the EUR/USD at 1.1080, but they only get into the market at a price Read this Term, some customers ended up in negative balance territory. To date, data from the Japanese Financial regulator shows that several Japanese FX brokers still have uncollected collateral.
The bulk of the losses is with retail clients. A total of 6,389 customers got affected with brokers looking to collect from them ¥808 million ($7.4 million). Corporate clients got affected to a lesser extent, but brokers are still owed ¥135 million ($1.2 million) from 209 customers. The total figure amounts to ¥943 million or $8.6 million.
Total amounts owed by clients to Japanese brokers after the JPY flash crash
Putting things into perspective, unclaimed balances from clients around the SNB flash crash in January 2015 totaled to about ¥3.4 billion ($31 million at current exchange rates).
Total amounts owed by clients to Japanese brokers after the SNB flash crash
Risk Control Failures
Despite the fact that companies have already dealt with a similar occurrence, the January flash crash exposes weaknesses in risk controls. Brokers outside of Japan confirmed to Finance Magnates that client losses have been astonishing during the day.
That said, brokers worldwide have not been affected as much due to the lack of sufficient trading volumes in JPY pairs. Market making brokers in the meantime have booked significant gains for their books.
The event could reintroduce discussion at the Japanese regulator about leverage and possibly the lack of negative balance protection for retail traders. For now, brokers which are facing the loss have a choice whether to chase their clients or forgive the loss.
The SNB event in Europe was perhaps one of the major triggers for the review of the retail brokerage industry.
Japanese STP brokers have not remained unscathed during the first trading day of the year in the country. During the early hours of January 3, before the Tokyo market opened, a massive flash crash across JPY currency pairs affected Japanese yen traders dramatically.
After flushing stop-loss orders, client losses across the board were significant. For Japanese STP brokers, however, which under the regulatory regime are not offering Negative Balance Negative Balance In its most basic form, a negative balance represents an account balance in which debits exceed credits. A negative balance indicates that the account holder owes money. A negative balance on a loan indicates that the loan has not been repaid in full, while a negative bank balance indicates that the account holder has overspent.In the retail brokerage space, this phenomenon occurs when a position’s losses in an account exceeds the available margin on hand from a given trader. When a trader place In its most basic form, a negative balance represents an account balance in which debits exceed credits. A negative balance indicates that the account holder owes money. A negative balance on a loan indicates that the loan has not been repaid in full, while a negative bank balance indicates that the account holder has overspent.In the retail brokerage space, this phenomenon occurs when a position’s losses in an account exceeds the available margin on hand from a given trader. When a trader place Read this Term protection, the sharp move caused the recurrence of a familiar pattern.
USDJPY 5M Chart
Just like after the SNB many brokers couldn’t chase their clients for the losses on their books, the January flash crash ultimately affected the companies too.
The magnitude of the event was not as pronounced as the Swiss franc spike in January 2015. Nevertheless, the total losses suffered by Japanese STP brokers on the first trading day in Tokyo this year totaled to about $8.6 million.
Flash Crash Event
The flash crash unfolded over about 10 minutes. Prices slipped during the most-illiquid time of the day, during the New Zealand trading session. Japanese yen crosses were the primary drivers for big moves across all major currency pairs.
As stop loss orders of clients got executed with significant Slippage Slippage In financial trading, slippage refers to the difference in price between the price an order was intended or expected to be filled and the actual price an order was filled. Slippage is a very contentious issue among retail traders, which can lead to issues. Many traders view levels of slippage at brokers as a key determinant for their business. For example, in forex trading, if a trader places a trade intending to enter a buy on the EUR/USD at 1.1080, but they only get into the market at a price In financial trading, slippage refers to the difference in price between the price an order was intended or expected to be filled and the actual price an order was filled. Slippage is a very contentious issue among retail traders, which can lead to issues. Many traders view levels of slippage at brokers as a key determinant for their business. For example, in forex trading, if a trader places a trade intending to enter a buy on the EUR/USD at 1.1080, but they only get into the market at a price Read this Term, some customers ended up in negative balance territory. To date, data from the Japanese Financial regulator shows that several Japanese FX brokers still have uncollected collateral.
The bulk of the losses is with retail clients. A total of 6,389 customers got affected with brokers looking to collect from them ¥808 million ($7.4 million). Corporate clients got affected to a lesser extent, but brokers are still owed ¥135 million ($1.2 million) from 209 customers. The total figure amounts to ¥943 million or $8.6 million.
Total amounts owed by clients to Japanese brokers after the JPY flash crash
Putting things into perspective, unclaimed balances from clients around the SNB flash crash in January 2015 totaled to about ¥3.4 billion ($31 million at current exchange rates).
Total amounts owed by clients to Japanese brokers after the SNB flash crash
Risk Control Failures
Despite the fact that companies have already dealt with a similar occurrence, the January flash crash exposes weaknesses in risk controls. Brokers outside of Japan confirmed to Finance Magnates that client losses have been astonishing during the day.
That said, brokers worldwide have not been affected as much due to the lack of sufficient trading volumes in JPY pairs. Market making brokers in the meantime have booked significant gains for their books.
The event could reintroduce discussion at the Japanese regulator about leverage and possibly the lack of negative balance protection for retail traders. For now, brokers which are facing the loss have a choice whether to chase their clients or forgive the loss.
The SNB event in Europe was perhaps one of the major triggers for the review of the retail brokerage industry.