Trading News Trading Tips

And the brokers go BOOM!

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.


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.

Trading News

One broker is so nervous it’s shutting down

The following got mailed out to customers of the forex broker Oanda yesterday:

Due to the extreme volatility some market analysts foresee could result in the coming days, OANDA fxTrade will not accept any trading activity from 6:00 AM EST until approximately 3:00 PM EST, on Sunday, June 17, 2012. OANDA believes the convergence of a major market event during off-market hours represents a potential trading risk and has taken this rare step to protect traders from excessive rate fluctuations.

Please note that during this halt in trading, you can still access your account details but no trading activity will be accepted. For this reason, OANDA strongly recommends that all traders consider minimizing currency exposures prior to the trading halt.

If you do intend to maintain open positions during this period, be aware that OANDA will hold exchange rates steady during the trading halt. However, when trading resumes, rates will immediately adjust to the current market rate and it is possible that the updated rate could result in a margin closeout if the price has moved significantly against your positions. Therefore, it is your responsibility to ensure you have adequate funds in your account to prevent a margin closeout.

Of course this basically just means Oanda will be acting list almost every other broker in not allowing trading on Sunday before the Asia open, but this is a new thing for them. My immediate cynical reaction is that the markets probably won’t end up doing anything much at all. 🙂

It should be noted, though, that this is totally a risk management decision. You can be sure Oanda is going to get as flat as they can heading into the weekend to ensure they don’t take a big hit from a volatility event. Methinks there are a few traders out there who could learn a thing or two here.

Trading News

This is NOT the Death of US Retail Forex Trading!

I came across a post on the BabyPips forum this morning. It was written a couple of days ago, but somehow I missed it the first time around. It had the inflammatory title “The end for Retail Forex in the United States?” The posts references a CNBC article and an SEC ruling about the subject of the SEC putting through a rule (as required by Dodd-Frank) to extend existing retail forex trading regulations for another year so new rules could be properly written. Had the SEC not made this move, retail foreign exchange trading by SEC regulated firms would have been rendered illegal.

Please note here that this only applies to SEC regulated firms. That means securities brokers and deals. These are the likes of Schwab, Ameritrade, etc. This does not include the vast majority of US retail forex brokers, as they fall under CFTC regulatory purview (see New CFTC Rules for Retail Forex Trading).

The CNBC article portrays the SEC chief has being uneasy about retail forex, but it doesn’t sound like he’s racing to crank up the regulation. There is a concern in the securities industry about the impact new rules might have on traders and investors who transact in foreign stocks and bonds and look to hedge their currency exposure.

So, the bottom line here is that while the final SEC rules may determine future developments related to retail foreign exchange trading where the securities brokers are concerned, as some do operate in the space and others have talked about expanding into doing so, it is not something which is going to impact the vast majority of existing US forex traders in any meaningful way.

Reader Questions Answered

Screwed by his forex broker

The following rant was posted in a forum by a clearly frustrated forex trader claiming his broker (I’ve removed the name) was trading against him.

….They are totally and 100% trading against you.. They will not even make you a dollar!..I had my account for less than 2 days and they ate all my money…

there was an uptrend…i was buying and what do you know! goes downtrend!

So decide to sell (since it was a downtrend and from the first 5 seconds, it started again uptrend…That happened 7 times!!!! is this COINCIDENCE?????

Well well well…would you look at this now? my order closed because i was losing money from a downtrend and now its again an uptrend…LOOK AT THIS COINCIDENCE!!!!

I think I can safely say that many who have been in the markets for any length of time have had a situation where they found themselves chasing a whipping market. It’s a horrible feeling and a quick way to the poor house if you’re not keeping your exposure very low. From that perspective we can all feel quite a bit of sympathy for this person.

Now, having said that, clearly we have a case of wanting to find someone else to blame for one’s own errors. Even market making forex brokers do not make trends. They might at best clip your for a few pips to run a stop (assuming they do such things), but they cannot turn the market as a whole by themselves. There was no way this was ever going to be a “my broker screwed me” situation.

Fortunately, the poster of the above comments actually seems to have accepted the face that it was him, not his broker, which was the problem. He admitted all the negative talk about brokers got him riled up, but after hearing from a few respondees to his post has recanted and come to realize he was chasing the market, not falling victim to an unethical broker.

Having said all that, forex price data is pretty easy to come by. Anyone can sign up for demo accounts with a number of brokers. If you suspect your broker of playing fast and loose with their price quotes, compare them to others and see if there’s a big different (not just a couple pips).

Trading News

No Evidence of Stop Hunting by Retail Forex Brokers

The subject of stop hunting continues to come up quite frequently, especially where forex trading is concerned. In response to a thread on the subject, Skalpist left the following comments on a BabyPips forum entry (the main question of the thread was whether Oanda runs customer stops). I certainly haven’t done the kind of testing mentioned here, but I agree with the general conclusion.

I’ve tested this theory on A LOT of brokers. I have yet to find a broker that really stop hunts. One way to test this for yourself is to run multiple copies of MetaTrader each with a different broker.

At 4Squared, at one time we were doing this for 18 different brokers at once and tested across all of them for 6 months. In all that time, there was not a single SHRED of evidence that any of the brokers did anything remotely like what they are repeatedly being accused of.

Oanda was one of the brokers we tested.

Thus far, in all of our testing, we have found a 100% correlation between traders simply making poor trading decisions and their claims of stop hunting.

In short, Oanda doesn’t stop hunt, neither does IBFX, neither does FxOpen, or FXCM, or …

In the case of Oanda, they have something north of 1 billion in deposits and several hundred million in active trades. Do you really think a company that is making that much money servicing trades is going to screw it up in such an easily verifiable method of stealing? Give me a break.