On Negative Balances, Industry Practices and Terms & Conditions Habits
While there is a case that retail investors need some degree of protection from extraordinarily volatile events on the marketplace,
Have you recently purchased a new gadget device, a phone, a music player or a new application from Google Play or the App Store? Were you presented with a list of 20 to 100 pages of terms and conditions to agree to? Chances are you were and you merely scrolled down to press the I agree button without even paying attention to the fine lines.
Chances are, that if you have opened a brokerage account with a regulated broker, you did exactly the same, without ever thinking of the ramifications of this decision. If you have been long the Swiss franc before the Swiss National Bank’s surprise decision last month, chances are that you already regret pressing that agree button.
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Recent media reports have pointed out cases of retail investors being chased for money by brokerages which couldn’t execute their clients’ stop loss orders at a predetermined level now raising a broader issue.
How many retail investors actually realize the risks that come with trading?
Since the outcry by a relatively small number of retail investors has been quite vocal, and the mainstream media picked up on stories of customers of certain brokers losing substantial portions of their net worth, it’s worth pointing out that these same people have never even come close to realizing that leveraged trading carries risk.
A Wall Street Journal piece, which was run on Monday, highlighted Saxo Bank as the villain chasing negative balances, in what is a very biased and one-sided report. It retold the story of Saxo Bank clients getting re-quoted as the bank’s risk management system did not react properly in the aftermath of the SNB decision.
From my 10 years of experience on the financial markets, I have seen software systems crash in times of extraordinary volatility too many times. This is why the terms and conditions of a big majority of brokerages do not involve guaranteed stop loss orders.
Some brokers have taken the risk of providing clients with guarantees, others have not – there is no regulation making them do so. Rightfully so, because it would create a more costly market place, especially for true ECN brokers who registered most losses after the SNB debacle.
Saxo Bank’s Long CHF Clients Have Been Warned
Clients of Saxo Bank in particular suffered losses from the re-quotes which the bank was forced to reconcile the trades at. While the best public relations move for the company would have been to write off all of the losses incurred from the event, the company did its fair share of work when informing customers who were shorting the Swiss currency.
In September, Saxo Bank stated to its clients that increasing pressure on the 1.2000-1.2050 EUR/CHF floor area and the build-up of short CHF (Swiss franc) positions in the broader market could represent a large risk should the 1.2000 floor give way.
The Danish brokerage stated to its customers, “We believe any breach of the 1.2000 peg could see a significant appreciation of CHF.”
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In the same article, Forex Magnates reported, “The statement by Saxo Bank that the move comes to reflect a potential increase in risk and to protect their clients makes all the sense in the world. Should for any reason the Swiss National Bank (SNB) fail to hold the Swiss franc’s floor level against the euro, the triggering of stops below can result in massive slippage and the market could easily gap several figures, just as it did almost 3 years ago after the SNB announced the implementation of the 1.2000 floor.”
Well, we were wrong, the event was way more powerful than the one three years ago, but that doesn’t change the fact that clients of the brokerage were warned.
Saxo Bank’s CFO Steen Blaafalk on Negative Balances
Forex Magnates’ reporters reached out to Saxo Bank and other brokerages that did not forgive client negative balances, asking them about the issue. Saxo’s CFO Steen Blafaalk, responded to some questions, while we received no comments or “no comment” answers from the rest.
Why do you think there has been this misconception that clients are always guaranteed to get their stop losses executed at the rate they filed the order at? Where could that misconception have come from?
I understand the confusion because this is the first time in 30 years that I’ve seen such a big price gap in such a mature currency.
Do the terms and conditions state clearly that investors are carrying the risk of losing more than their initial investment?
Yes, Saxo Bank is a European regulated bank and our business terms serve as the legal basis for our actions on the CHF move and we acted and are still acting in accordance with our General Business Terms which each client has accepted to be bound by.
In the case of Saxo we hear that the main problem for clients has been that their trades were executed at quite good levels, only to get re-quoted at a later stage sending their balances below zero – what backstop failed here?
Many orders had to be executed at the crucial minutes of SNB’s announcement and it took around 30 minutes before the liquidity came back to market and the total amounts of order finally had been filled. In order to make an objective pricing of all client orders and ensure best execution, all orders had to be filled in order of sequence from when they were initiated and to when the could be filled. This had to be validated after all the execution had taken place, to ensure all was treated fairly.
Do you think that “dumbing down” of marketing materials related to financial markets products throughout the years has had an effect on clients to create this false sense of security?
I definitely think that that regulators may demand a minimum margin requirement, and I would welcome them looking into it. There has been too much competition on the margin requirement. Some minor brokers allow leverage up to 400. When you increase the margin, clients can’t trade as actively. That’s some brokerages’ bread and butter. But some of us want to have a lifetime relationship with clients, so we want to offer a prudent opportunity to do risk management and diversification and to add value.
“But some of us want to have a lifetime relationship with clients”
Right, that is exactly why you will go around and chase them to sell their house in order to repay you. You sure will have a lifetime relationship of hate, disgust and legal proceedings with them, alright.
Another set of one-sided (paid-for) reporting from ForexMagnates.
Saxo Bank failed in it’s risk management and exposure to LPs in the same way that FXCM failed. Trying to recoup negative balances from retail investors is the pinnacle of your failure. The WSJ article was spot-on.
Shame on you. You mess-up, you absorb the losses.
(yet again a screenshot has been taken in case of selective posting by ForexMagnates)
Many lawyers will disagreed with Saxo Bank… some of saxo bank terms are not according with europe laws
http://www.peres-partner.com/saxo-bank-stop-loss-order-margin-calls/
http://www.anwalt24.de/beitraege-news/fachartikel/bleibt-die-saxo-bank-auf-den-neu-berechneten-verlusten-ihrer-kunden-aus-den-eur-chf-turbulenzen-sitzen
Vitya how much did they pay you for this article? C’mon you can tell us!!
I think this ‘ Black Swan’ event shows , that the whole retail forex trading industry, should be closed down, and everyone involved in it from Saxo to forex websites etc aimed at retail traders, should get themselves a proper job within the world.
How come other brokers managed to execute its clients stops? Isnt it what brokers are for? When Saxo Bank was watching 1 yrd of eurchf stops below 1.20… what were their plans or strategy ? They warned several months ago but Saxo Bank was not ready? This your today article with other broker…. At 11:30 on January 15th, the SNB removed its 1.20 floor on EUR/CHF. Around 47 seconds later the pair dipped below 1.20 and was trading just above 1.17. Ten seconds after that it tumbled harder and faster than any major pair in the history of FX. Due… Read more »
@ John Allestein – did you steal my fake nickname? I just wonder do you really understand what you are talking about? This line shows that you are a clueless troll: “Saxo Bank failed in it’s risk management and exposure to LPs in the same way that FXCM failed” – what failed is that banks stopped quoting and thus the gap leaped over clients’ stop losses. Regardless, Saxo handled CHF risk in a very different way than FXCM so how do you even compare? Did you know that “its” and “it’s” are two different things? Lastly, would you enlighten your… Read more »
Yes, sure you wanna have a lifetime relationship so a reasonable compromise in that case could be offering a leverage of up to 1:200. It’s not that insane figure of 1:400 but clients can still work with it.
Surely if you make a wrong way bet, you should lose money. However there is also a basic consumer protection question here – not protection from losses, but from faulty products. Many of these platforms were overwhelmed by the flood of stop orders and simply buckled under the weight – their technology is not nearly as robust as they advertise. IG took almost 10 minutes to MANUALLY aggregate thousands of stop orders before they were prepared to even start hedging, which of course by then was much too late. If you bought a car whose brakes only started working 10 minutes after you… Read more »
Not familiar with Saxo ‘ s platform. Do they have auto liquidation functionality on the client front end? If so, they assume these risks, not the client. Cannot have it both ways.
i think there must be a certain level of basic product functionality and responsiveness, which is very aggressively advertised to spread betting clients in particular. basically these spread betting companies market themselves as hi-tech computerized auto-trading gizmos, but in reality they are nothing of the sort. they are interfaces with a lot of manual interventions and spreadsheets and (apparently) very poor execution traders. they made some very human errors in a time of huge market volatility – and are now trying to pass all the responsibility to their clients and hide behind the markets rather than accept their own technology… Read more »
@James, you are on the right track. The real problem is that the broker wants to solicit clients and encourage them to trade (recklessly) when times are good. But when it doesn’t work in their favor, they want to ‘lawyer up’ immediately. Can’t have it both ways. It needs to be stated clearly in their terms and conditions what they will and will not be responsible for. Some brokers have done this, and others are still intentionally being ambiguous. And the brokers who SPECIFICALLY advertised across numerous channels (forex forums, youtube videos, website documentation, etc) that they would cover negative… Read more »
@Lawyer: could you please show/explain us what laws are not according with European laws?
you could also send an email to the following address: igeurchfloss@yahoo.com
Cheers
traders doing business with brokers that do not guaranty NBP did not care about their risks enough when they opened their accounts. This NB chasing could occur any time – there are plenty of quick and big moves in the market. Before getting into a business the trader should read the contract. There are plenty of brokers who care about their clients.
I disagree with nich. I think that many traders are aware of the risk and that understand these. But these events separate the wheat from the chaff. How is a retail costumer supposed to know how brokers react in such a drastic situation? They all advertise themselves as user friendly
@Peter, How is a retail costumer supposed to know how brokers react in such a drastic situation? – It is very obvious, if the broker does not bound by the promise to observe NBP, he will definitely chase for them because it is businesslike behaviour, natural and rational one. If the trader does not check contract for this condition then he is careless, if he checks but ignores the lack of it then he is imprudent. To hope that the broker will forgive NB for moral aspects is naive. The only thing that is not understandable is that those who… Read more »
@nich. Mate, with respect, if anyone actually read and understood every word in the terms and conditions of their spread betting firm then no-one would ever spread bet. The T&Cs basically say ‘We hold no liability for anything, we can do what we want and our clients hold all risk and liability’ That’s how T&Cs are written. They are a legal ars* covering document. What’s important here is what is fair and reasonable. The events of January 15th, and the outcome this created for retail consumers, can not be considered as fair and reasonable. Any company that hides behind their… Read more »
John Smith@” the spread betting companies have the blood of hundreds of consumers, and their families on their hands” Then why do they still enjoy hundreds of millions of clients funds on their accounts? Why is there no rush out of such brokers? Let’s say there is only few hundred euro of NB (as the result of the gap in ordinary situation) the client need to pay out. Is that ok when the trader loses his account in full and still owes to his broker? And this is a situation everyone risks to face if there is no NBP guaranty.… Read more »
For those that have been affected and believe their should have been more client protection from broker inefficiencies…..
Can you please make sure that you sign this petition. Its from an organization called Change.Org. For every one that signs this petition, it will send an email to
1) the head of Supervision at the FCA
2) the head of the UK Treasury Select Comittee
3) the UK Treasury Department .
https://www.change.org/p/tracey-mcdermott-uk-financial-conduct-authority-we-urge-the-fca-to-investigate-the-misleading-advertising-and-unfair-business-practices-of-spread-betting-companies
thanks fighter, i will sign. whether or not we agree if spread betting companies should be able to collect negative balances or not, we can probably all agree (well certainly my experience indicates) that their execution capacities do not match what is advertised. IG’s certainly did not. I think they (and anyone else) should be held to account rather than just hiding behind market illquidity or whatever. its all smoke and mirrors to cover themselves. why did some brokers fill clients at 1.11 (FxPro) and some at .92 (IG)? were we all trading a different Swiss franc and i was… Read more »