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And the brokers go BOOM!

Normally market volatility is great for brokers. Not so much in the case of the forex market lately, though, showing how everyone needs risk management

The dust seems to be settling now, but once more we’ve seen how one event can create market mayhem with massive fallout. I am, of course, talking about the Swiss National Bank (SNB) removing the 1.20 floor below the EUR/CHF exchange rate. This was something largely unexpected in the market, so it caused considerable market volatility, as you can see from the charts of EUR/CHF, USD/CHF, and CHF/JPY respectively below.

SNB-Move-Reaction

Now normally when we talk above moves like this there are companion stories about traders and investors being wiped out. For sure, many traders got slammed by this action. Retail forex being a zero sum market, though, at least in that arena there were winners to match the losers.

The big retail forex brokers weren’t so lucky, though. Because they have a policy of not letting customer accounts go negative, they were exposed to the market move in a way that was rather like being an option writer. Forex Magnates suggested the losses to the industry could have been $1bln or more. A couple of the bigger names (FXCM and Alpari) were put under severe pressure as a result. Just goes to show that market risk is not something to be taken lightly, no matter the form.

Not surprisingly, the volatility in the Swiss franc, which cascaded into other currencies, triggered an increase in margin requirements. Individual brokers increased them unilaterally and in the US the NFA increased them for everyone later.

On a more personal basis, I now have to add a little something to my PhD thesis due to these events.

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