Without a doubt, the decisions of the Swiss National Bank (SNB) and the subsequent volatility in the currency markets presented a crisis situation for much of the forex industry.
The unprecedented action from the SNB was all the more impactful because the Swiss franc was perceived as a safe haven – a bastion of financial stability. The fallout of this decision meant that many forex traders incurred substantial unexpected losses and negative balances, which were then passed on to their brokers causing a shock wave to ripple through the industry on all levels.
The developments following the SNB decision have served as a clear reminder to the industry that risk management is not only necessary – it is imperative – and it counts. In the heat and excitement of the fast-paced currency markets, where breaking news has the power to influence price movements and traders rush to capitalize on opportunities on a daily basis, it can perhaps be easy to forget risk management.
Black Thursday or a stepping stone?
Forex is an undeniably exciting market, but like all exhilarating activities, it’s important to take precautions, because circumstances can change in a heartbeat, often without warning.
The way in which the forex industry and individual brokers deal with this crisis will determine whether January 15th 2015 becomes a ‘Black Thursday’ in the history of the financial markets, or a stepping stone from which to learn and grow.
In my many years of business I have come across several major crises in the financial markets. Let’s not forget after all that forex itself was born out of a financial crisis. It was also propelled further onto the global stage by the 2007 subprime banking crisis in the United States, when there was a sea change in the established equities and bond markets.
These were formerly seen as the secure investment to make, however this accepted ‘reality’ was washed away by the maelstrom of bad mortgages. The consequences of a lapse in risk management were clear in this situation, but like all crises, opportunities arose for other sectors of the financial services market – most notably forex.
What I have taken away from these experiences is that any business can excel even in the most adverse of circumstances, as long as certain core values remain, and as long as adverse events are not just condemned, but learnt from.
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The forex market, as we all know, is fast-paced, constantly moving, and ever-evolving. Those who wish to not only participate, but thrive in such an industry must act in the same way. We must constantly be preparing not only for what is happening today, but for what might transpire tomorrow.
A delicate balance
A crisis undeniably has a negative impact which it would be preferable to avoid. But it also offers an opportunity to see where cracks in a system might lie, and where new problems might lurk – on an individual, company and industry level. It also reminds us that we can never be complacent, and never get too comfortable with the status quo.
The decision by the SNB to draw a line on its overexposure to Euro losses is a good example of risk in the forex markets, which are particularly sensitive to central bank decisions right now.
This has been the case since 2007, mainly because economic growth in developed countries is so uncertain after the sovereign debt crises in the Eurozone, in addition to the EU banking crisis that was an inevitable result of the US subprime crisis. Switzerland is always perceived as a stronghold of financial stability, so when the SNB said ‘enough’, it carried a lot of weight in the currency markets.
Last week’s developments present such an unprecedented situation that will undoubtedly change the industry landscape. Extraordinary volatility has now become a burning issue for market regulators and brokers to resolve together; it’s a delicate balancing act because the forex market has the character of a completely open online demand-and-supply marketplace, but at the same time, risk management systems must be in place for both traders and brokers.
The only certainty in these economically unstable times is that the next crisis could come from anywhere. Brokers need to have precautions in place, and in our business, they’re called risk management.
Andrey Dashin, Founder of Forex Time and major shareholder at Alpari UK