The biggest news in the Forex markets so far in 2015 has been the Swiss Franc. On Thursday 15th January the Swiss Central Banc announced that it had abandoned the 1.20 floor that it had been defending in the EUR/CHF. Within minutes the pair collapsed.
The Franc appreciated over 30% before most people has even realised what had happened causing huge issues for many brokers.
To say the move came as a surprise to the markets is an understatement. The SNB (Swiss National Bank) had been aggressively defending this level for a number of months, both officially and unofficially. When it pulled the plug the floor fell out beneath the pair. This is what lead to such big moves.
Swiss currency crosses (CHF) jolted. Stop and orders were triggered in an instant. It wasn’t just the Swissy that moved however. The knock-on effect proved significant for other currency pairs too. Caught up in this quick move, traders scrambled to reallocate their capital. Gold shot up. The Euro got kicked.
Following the initial fallout, the Swiss Franc remains bid. EUR/CHF for example retains the bulk of its initial loss. There is of course some fragile stability now evident. The long term outlook will of course change following this major event. Traders are likely to become ever more twitchy as to what might happen next.
Many market participants had backed the EUR/CHF trade for long periods of time. It was seen by many as a one way trade. However when the news hit the wires, those with positions open found themselves very quickly underwater. The lack of liquidity triggered huge margin calls.
Traders with stops were offered no protection. The problem was that the moves was so sudden and so severe, liquidity was not found until some 30% had been wiped off the value of the Swiss Franc. Even those will small positions racked up BIG losses. In short many traders accounts were taken to the cleaners. They now owe their broker big time to settle their accounts. Of course this depends as to whether their brokers choose to pursue them.
Big Name Brokers Fail
No one likes to hear of retail traders racking up big losses. However they weren’t the only ones to suffer. A number of established and respected brokers took a hit. Surprisingly it was two of the biggest names that were truly rocked.
Trading in FXCM shares was briefly suspended as the broker went ‘cap in hand’ to ask for a rumored $250-300 million liquidity bailout. A further respected name, Alpari UK actually suspended trading. It briefly declared itself insolvent and handed itself over to the UK regulator the Financial Conduct Authority (FCA). Whether a rescue package will emerge remains to be seen.
It remains to be seen whether brokers will chase losses run up by traders after the sudden fall. If there is one glimmer of light it is that segregated client accounts stipulated by the regulator has at least safeguarded any deposited funds. Provided these are still in place, this money can be returned to clients.
The short term nature and limits on trade sizes used binary options has helped protect both traders and brokers from this storm. Some brokers had already removed Swiss pairs from their line ups previously. In retrospect this looks a good move. If nothing else it has avoided awkward questions from clients following events as we have just witnessed.
Binary options trading often gets a ‘bad wrap’ within the trading community. However the fixed risks associated with trading and lack of direct investment in the underlying asset, provides some protection. This is something that the likes of spot Forex Market Makers and Spread Betting platforms are unable to.
While ‘sophisticated’ traders often bemoan binary options, I suspect many will now be wishing that their exposure to the Swiss Franc had been via a limited risk contract. In this way they would have avoided the ravages of the market.
Lessons To Learn
It is of course understandable that most people will have a favourite broker for trading binary options. It may be that they like certain features that they offer or simply that they have been used without hassle for a long period of time.
Whatever the reasons for trading with a particular broker, the events of last week have taught us that it is important not to get attached to a particular company. OK, so most brokers have escaped without any major fallout from the events last week. However the next ‘Black Swan’ event might not see Binary Options brokers being so lucky.
The key lessons we should all learn from last week is diversification and regulation. These are essential to providing you with trading safeguards against both acknowledged and unforeseen events.
From the asset that you trade to the broker that you use, you need to spread your risk to avoid any single point of failure. Open multiple accounts to split your funds, trade different strategies in separate accounts or even trade only specific assets in one account. Also don’t hold high balances in a single account. Whichever way you do it, make sure that you diversify your risk.
As we have seen even some of the largest trading brokerages can fail if the conditions are right. Therefore you need to be on your guard more than ever as we move into 2015. Use these recent events as a less. Split your funds and open up some additional accounts today. Make sure you take steps to diversify your risk before it is too late.
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