On January 15th, 2015 Swiss national Bank (SNB) created havoc in financial markets by removing the Euro peg abruptly without any prior warning. SNB just two days ago assured market participants about the peg’s stay. That day, franc at one point was up 40% against Euro.
- Brokers large and small, retail traders taken a hit on that day, creating panic in the market. Forex broker Alpari announced bankruptcy whereas FXCM took a hit of $225 million and was on the verge of bankruptcy.
- FXCM since then sold its Japanese arm to Rakuten securities for $62 million. FXCM sold Faros trading to Jefferies for an undisclosed amount. It is now looking to sell more assets like FastMatch, its HFT platform of which it owns 35%. It is also planning to sell V3 markets and Lucid markets.
Prior to the peg crisis FXCM was considered as the one of the top brokers in the retail markets, which was showing potential in interbank market. FXCM still have potential, however lost the aura.
Lessons and takeaways –
- Having a credible broker may not be enough as adverse shock in the market can take out any body as seen in the case of Alpari, Lehman Brothers, MF Global over and over again.
- Keeping stop loss in place are very essential, however Swiss shocker shows that may not be enough. Many Stop loss trades were not executed due to lack of liquidity during the event.
What to do?
- Choosing the right leverage is of utmost importance.
- For example one has $100, uses 3:1 leverage and ends up taking position $300 worth of securities. 10% change in the price and net cash drops by $30, however one survives to try another day but use 10:1 leverage and with 10% change total cash is wiped out.
So with balance leverage and stop loss in place one might survive most of the shocks.
The material has been provided by InstaForex Company – www.instaforex.com