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Screenshot of a breaking news alert e-mail from Q2 2017
In our continuing coverage of how some of the Forex industry’s leading firms dealt with Black Thursday and what has followed, we are pleased to speak today with Andrew Edwards, CEO of leading UK-based online trading firm ETX Capital.
With a lot of the talk post-SNB move revolving around M&A – e.g. who might buy Alpari UK, will FXCM be able to sell itself to create a return for Leucadia and for its shareholders, are there other wounded brokers it there looking to be bought out… – ETX is certainly a voice to be taken seriously. It is one of the few Forex firms to actually have successfully made acquisitions, including its August 2014 purchase of platform and IT provider Ariel Communications, and its June 2014 acquisition of Ireland-based financial spreadbetting firm Shelbourne Markets.
(On that note, we separately reported that ETX has made a bid to buy Alpari UK).
LeapRate: How did ETX deal with the Swiss Bank crisis? What was it like in the office there last Thursday morning? What did ETX do differently than some of the other brokers who didn’t get through Thursday’s spike as easily?
Andrew: The word I’ve been hearing most often in connection with the SNB’s decision to scrap the Franc Vs. Euro cap is ‘unexpected’, which is entirely accurate; it took everyone by surprise, and FX brokerages were no exception to the rule. There was a high-octane atmosphere on the ETX Capital trading desk as our FX and Credit Risk Teams reacted to the unfolding events.
However, ETX Capital has a low risk appetite, meaning that if ETX clients take extremely large positions, we increase the amount required for initial margin thus protecting us and the client from events such as these. This proved to be highly beneficial on Thursday 15th, with ETX and its customers being largely unaffected by the events. We did have some trades being incorrectly executed on stale or off-market prices and those trades are being reviewed.
LeapRate: How can a broker properly risk-manage for such an event? How do you see the past week’s events affecting the industry?
Andrew: The truth is that there’s no guaranteed foolproof way to risk-manage this sort of thing – this was a ‘once in a blue moon event’. I’ve spoken to traders at multiple firms – we’re talking about people with decades of experience here – and everyone’s saying that they’ve never seen anything like this before.
Part of the problem has to do with leverage rates. Forex brokers often offer high rates of leverage to clients, whilst warning them that trading with large amounts of leverage can lead to either significant gains or heavy losses. In the case of the brokerages that went under, both of these outcomes came true.
Without knowing the exact details of what happened at the firms that went under or took large losses, it seems likely that they offered very high leverage rates, which meant that the huge moves on Thursday led to some clients making a huge amount of money whilst others ended up owing huge sums without having that money in their accounts to pay off what they owed. This would hit a broker on both sides of the trade; and clearly some brokers were unable to cope.
A good way of preventing that sort of thing from happening would be to only offer lower leverage rates; the problem is that many clients have previously picked Forex brokers precisely because of the high leverage rates they offered.
Up until now some brokerages clearly felt that offering extremely high leverage rates was a risk worth taking because the chance of such a market-changing event in FX was negligible. It seems likely that many brokerages may re-evaluate that in the aftermath of the SNB Surprise, as this brings home in quite a brutal way the fact that something that is ‘almost impossible’ is still possible.
LeapRate: Is there a lot of displacement of clients, IBs and affiliates?
Andrew: There’s certainly been a significant amount of upheaval, although a large number of clients, IB’s and Affiliates use a range of Forex brokers, meaning that for the most part people weren’t left with nowhere else to go.
A significant percentage of account holders may end up being fine; for example, many people who held accounts with Alpari UK and who are currently unable to withdraw funds should be able to get a large part of their money back in due course, because Alpari UK kept client funds in accounts which were strictly separate from the firm’s own money (ETX Capital does the same thing). The people who are far less likely to see any return are those who had open positions at now insolvent brokerages in trades involving the Swiss Franc. Those who technically made money during Thursday 15th’s events will probably not receive anything from the trade at all, whilst those who lost more money than they had in their accounts on Thursday should be prepared to be contacted at some point by an entity asking them to pay up what they owe. It is certainly not an ideal situation for anyone.