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,

Risk management 2Have 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.


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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.

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