Australia is just about as far from Switzerland as you can get. However the Swiss National Bank’s actions the morning of Thursday January 15 (or evening Australia time) were felt loud and clear down under. Australia is home to some of the fastest growing retail forex brokers – in part because much of their volumes come from the rapidly growing Asia-Pacific region – and the large move in the Swiss Franc that day affected their businesses and clients as much as brokers anywhere else.
We are pleased to bring our readers an insight as to how the events of that day and what followed were seen through the eyes of Australia’s largest and most prominent forex broker, AxiTrader. The following is our exclusive interview with AxiTrader CEO Goran Drapac.
LeapRate: Hi Goran, and thanks for joining us today. What was it like in the office there that day (or evening in your case)?
Goran: Given that the SNB had reaffirmed its policy on the peg in the week prior, the initial reaction was disbelief. Then prices reflected the reality. It wasn’t long before many interbank platforms’ pricing of CHF were either shut down or set to Refuse to Quote.
Texts, emails and phone calls about the news were rife overnight in Australia.
Prior to the volatility caused by the SNB’s action, the previous highest percentage move in the markets that I had ever seen occurred in August 1991 when Mikhail Gorbachev, President of the Soviet Union at the time, was placed under house arrest by members of his politburo and military. As a consequence, the USD/DEM moved 20% over a six hour period.
Since then, there have been other events that have caused currency volatility in the vicinity of approximately 10% in short spaces of time.
To put Black Thursday’s movement into perspective, the EUR/CHF moved 30% in a very short period of time. This was certainly the worst current “Black Swan” event in our lifetime.
LeapRate: How did AxiTrader deal with the incredible order flow after the SNB’s move?
Goran: No one can be fully prepared for an event like this. Some brokers and clients are definitely more prepared than others. AxiTrader increased its margins on EUR/CHF as early as November 2014 [Editor’s Note: see LeapRate’s article from November 26]. When the Ruble was under siege we raised margins and also wrote to customers advising them to take care over the Christmas – New Year period. These actions were taken to ensure our clients were more prepared for the potential risk.
Over the past 3-5 years, AxiTrader has invested strongly in its trading infrastructure ($4.2 million just last year). This investment is aimed at reducing latency, increasing capacity, improving liquidity and reducing execution times for our clients and with Axi’s various global bank liquidity providers. Our staff are on hand 24 hours a day monitoring the markets and our systems to ensure clients and company risks are always being managed.
As a result and as a testament to that investment, our systems performed: we continued to quote and fill market orders, where necessary clients positions were automatically stopped out at the best aggregated prices available from our pool of liquidity.
As AxiTrader’s pricing reflected the underlying interbank market, there was a period of time when lack of liquidity in the CHF impacted our pricing and speed of execution. But under these extreme circumstances, our systems performed well and all other currencies, metals and indices at AxiTrader were trading normally over this period.
Essentially, it was business as usual at AxiTrader.
LeapRate: What did AxiTrader do differently than some of the other brokers who didn’t get through Thursday’s spike quite as easily?
Goran: As mentioned previously, over the past three to five years AxiTrader has reinvested a large percentage of its profits into infrastructure to better define and manage both customers’ and the firm’s risk, as well as working to excel in client execution with Axi’s counterparties.
AxiTrader has a long-term perspective in the FX space to serving its clients and exceeding their needs. AxiTrader’s ability to manage Thursday’s spike occurred primarily as a result of the additional infrastructure foundation surrounding and supporting its MT4 platform.
Many other providers in this space have purely relied on the MT4 platform (which is primarily a front-end system) to manage all aspects of its business.
LeapRate: How can a broker properly risk manage for such an event?
Goran: We all know that such “Black Swan” events can and do happen; though this was a truly enormous event.
There are many writings and publications available regarding risk analysis and management of client exposure, net exposure of a firm, single currency pair exposures and exposures in relation to available funds and capital of the firm.
My view is that some brokers choose to be more proactive and prudent in all aspects of risk as listed above, whilst others choose to ignore or are not au fait with accepted risk management practises in these areas.
Relying on MT4 alone for the management of risk is not enough in such extreme circumstances.
LeapRate: Have you changed your policies or approach when it comes to leverage?
Goran: In response to some major global banking counterparties’ actions in discontinuing the pricing of currency pairs that are pegged in some way, shape or form, AxiTrader has removed pricing in the DKK and HKD currencies from its platforms and therefore its offering to clients.
This is to protect clients as much as possible from a similar event to the SNB announcement in these currency pairs that could trigger a large percentage move in the price of their currency if peg rates are suddenly changed or removed.
This is the only significant action or change that AxiTrader has taken to mitigate the potential for future client losses under similar circumstances. But, we are always monitoring the markets and will make changes if we think it is prudent to do so.
LeapRate: What is your situation with negative client balances?
Goran: Client funds held with AxiTrader are segregated. The total negative client balances were a small fraction of AxiCorp client funds on deposit. Ten clients represented 80% of the negative balances.
For those customers generally who have suffered losses it is a difficult situation and we really do understand the emotional impact this can have.
We understand that some customers cannot accept what has happened and they feel let down by their brokers. All we can do is work with them to help them understand what happened and how it happened. Then it is a matter of whether they have the capacity and desire to fund the deficit.
Axi has recovered some negative balances and is in the business of working with other clients for further recovery.
LeapRate: How do you see the how the events of the last two weeks have affected the industry?
Goran: Without going into the manner the SNB handled its decision:
- The events have certainly re-awoken all participants in this sector to the risks within the industry.
- There has been a flight to safety for clients to those broking firms relatively unscathed by the SNB action.
- Volumes have been at least steady to higher since this activity.
- Deposits continue to be received to fund trading.
- Interbank deposit margins have definitely increased, and we are seeing some retail providers passing on these higher margin requirements to clients.
- It is interesting to review the demographics of those brokers most affected by the price volatility from the SNB’s actions. It was very reassuring for us to know that entities working under the regulations of ASIC came through relatively unscathed, which helped reinforce Australia as a relatively safe regulatory environment in which to do business.
- The disproportionate losses incurred by some of the big global firms operating in the FX environment has helped traders realize that the larger firms are not necessarily the safest.
- The management and staff of AxiTrader are truly upset for all those who have been badly impacted by this event.
LeapRate: Is there a lot of displacement of clients, IBs and affiliates?
Goran: The answer to this is definitely yes.
The switching of client accounts from those brokers receiving bad press has sharply increased.
AxiTrader has been recipient of such switching.
LeapRate: Do you see any clear winners from what happened?
- Entities operating under the supervision of respected regulators such as ASIC.
- Those who were prudent enough to have already instigated proactive and more encompassing risk management procedures in the protection of their clients and their own capital.
- Most importantly, more clear winners in this industry will emerge from those who have learned that they must protect their clients and themselves against future events that will provide unexpected large percentage price volatility in the marketplace.
However, there are those who will not learn.
In my 35 years of working in the FX markets, I can assure you that many will forget the ramifications of such sporadic events.
The only great certainty is that no matter what the activity or event, the FX markets will always survive.