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The CHF blood bath, explained

17 January 2015

48 hours into the CHF debacle, it’s always healthy to carry out some post-mortem analysis to learn the lessons of why it happened, and what we could have been done to weather it better.

Since we’ve done it, why not share it?

The macro-story: Black-Wednesday, redux

What happened is crystal-clear with the benefit of hindsight (as it always is).

The CHF is a currency safe-haven, albeit a rather illiquid one, since it’s only backed by a tiny and financially hypertrophic economy. Ever since the EUR crisis, everyone and their mother placed some of their safety net in CHF – so much so that the Swiss National Bank was forced to ¨intervene¨ to keep the level at 1.20 to the EUR.

The intervention mechanism was: whoever bought CHF close to 1.20 sold to one counterparty, and one counterparty alone – the SNB. In broker parlance, the SNB became the daddy of all market makers by being the only player in the market with “unlimited” access to CHF close to the 1.20 EUR/CHF cliff. This filled the balance sheet of the SNB with foreign currency reserves… above all with a boatload of EUR, for EUR area is the Swiss’ primary commercial partner and the home currency of nervous europeans who by now trust neither their “unbreakable” currency, nor their tax-agency (the latter being food for another post).

With the EUR crisis on its way back (it has never really left…), the EUR has gone on free-fall, and EUR reserves were drilling the daddy of all P&L hits in the SNB balance sheet. That was before Herr Jordan got Mario’s phone call kindly announcing QE. Herr Jordan’s press conference is (financial) history being written as we speak.

Black Wednesday on September 16th, 1992, George Soros hit the headlines. Actually, he didn’t until after the dust had settled.

On the January 15th Donnerstagsdebakel (made this up, but it’s fitting for Thursday is the day of Thor and Thunder, depending on the language you choose), someone else hit the Jackpot.

We don’t know the name of the winner yet: journalists are still chasing around for a name and a photo to head their scoop… but if you want an outline of his likely background, read on.

The (retail) micro-story: Dancing on a cliff

We (traders, brokers, broker-dealers, and dealers) went about our business, nonplussed.

Traders saw juicy price-action dynamics at that level, and brokers readily offered (leveraged!) trading access to the CHF. Again with hindsight, everyone was dancing on a cliff… not wondering too much what would happen if (actually, when) Hoover Dam fell.

Dancing-on-Glacier-Point-03

So far, all pretty standard, really.

The interesting (and sad) bit, and the one that has received the least early attention is that the Fall affected brokers (A-Book) and dealers (B-Book) in tragically different ways – just as you’d expect it, for brokers trade with customers and dealers trade against them.

This effect IS news, because what went belly up on Thursday is the capillary over-the-counter (OTC) system of broker-dealers that makes currencies flow world-wide.

a-book, aka involuntary (unprepared!) contingent market makers

The moment the previous market maker (the SNB) went on strike, Hover Dam fell and sent the EUR on free-fall against the CHF – which called the next market makers to action: customers short the CHF and their collateral posted with their agency-only brokers and Prime Brokers (we’re pure A-Book).

Once that was exhausted (the higher the leverage offered, the quicker), brokers’s and Prime Brokers’ stop-losses triggered, but there was no market, so the margin we had posted with our Prime Brokers was the market. We, a-book brokers became involuntary (and ill equipped) market makers of last resort, not against our retail customers, but our wholesale counterparties.

Technically we ran no risk since actually it was our customers shorting the CHF who got smacked. In practice, FXCM (and others!) now know better: you can’t hire an army of lawyers to track thousands of micro-debts because each debt is smaller than 30 min of lawyer fees.

So there you go.

If you’re looking for victims, you’ll find more than your fair share in the lines of pure agency Brokers and Prime-Brokers who catalysed spot foreign exchange flows between macro (Tier 1 Banks and Central Banks)market makers and micro (Hedge-Funds, retail traders, Tier 2 institutions) price takers.

b-book, unregulated retail bucket shops

The retail spot forex trading arena contains close to 1000 unregulated, undercapitalised, over-levered retail dealers (= bucket shops) who make markets against FX punters.

(How or why they are allowed to invest massive amounts into advertising to earn business in regulated markets escapes our understanding, but that’s for another blog post.)

More to the point, how did they fare? Just fine, thank you.

They kept the deposits of those short the CHF, as they always do – and they didn’t have any losses with wholesale counterparties to match (all they do is trade against customers, remember?).

So how about the winners? You can bet that many of those outfits will keep the P&L of winning customers (there was no market, re-quotes, blah-blah), as they always do. That’s when operating an unregulated casino comes in particularly handy.

So there you go.

If you’re looking for more victims, go find would have been genius… who discovered a tad too late that trading with an unregulated bucket shop is a variation on the age old “heads I win, tails, you lose” coin toss.

They could have been George Soros, but learnt the concept of counterparty risk instead.

Darwinex

We came out of this just fine, mainly because we did most things right, and partially because we were lucky.

What we did right was to anticipate the on-exchange move. We have been clearing all our flow with LMAX (a MiFID regulated MTF), partially because we think that there’s too much information asymmetry in OTC forex, partially because Exchanges facilitate clearing and settlement (go ask Saxo customers being re-quoted on their CHF trades), and generally because we think that on Exchange is the proper way of doing things.

We had minimal CHF exposure, both in absolute terms and in relative terms both to the bulk of our business and our capital base. We weren’t watching much (there was no need), took a tiny hit. 3-quarters design, 1 quarter luck, bottom line is we came out just fine, and a lot of our users are now migrating incremental funds to us, which is a great honor.

All in, this was the cheapest life-saving lesson we will ever learn. And you bet we’ve learnt it.

The road from here

It was probably going to happen, and the regulators were probably looking for a justification… and now they’ve got it.

The Spot currency exchange market is the biggest OTC market in the world. Because it’s also the oldest, it stayed OTC way after technology and common sense recommended the move on exchange. What held that back was the mess of having to put in place an alternative to the network of broker-dealers that kept currencies flowing, unknown to the general public and most of even informed people in finance . It was clunky alright, but it worked.

If anything blew last Thursday, it was the very internal pipes that kept the OTC foreign exchange market flowing. Tens of legitimate financial outfits will spend some time working out just how much they lost… others are simply gone. With the pipes gone, the regulatory ought to do do has become an urgency must do

If you have an opportunity to invest into a Multi-Lateral Trading facility that clears foreign currency, you can bet they’re going to be faceless big time winners of this, alongside the next George Soros. We, for one, have been trading with one because this bit we did see coming.

Last News

Updates to the MetaTrader 4 Platform

20 July 2017

We have been notified by MetaQuotes Software Corp. that as of 1 October 2017 (Sunday), support for Windows XP, Windows 2003 and Windows Vista will be discontinued for the MetaTrader 4 platform. As potential hardware capabilities can no longer be recognised, these operating systems are considered to be outdated. MetaQuotes has stated that Windows 7 […]

We have been notified by MetaQuotes Software Corp. that as of 1 October 2017 (Sunday), support for Windows XP, Windows 2003 and Windows Vista will be discontinued for the MetaTrader 4 platform. As potential hardware capabilities can no longer be recognised, these operating systems are considered to be outdated.

MetaQuotes has stated that Windows 7 is the minimum required operating system version for running MetaTrader 4. However, using the 64-bit versions of Windows 10 is strongly recommended.

Older versions of MetaTrader 4 will continue to work on Windows XP, Windows 2003 and Windows Vista. After 1 October 2017 (Sunday), updates will no longer be received and installers will not run on these operating systems. Without having your MetaTrader 4 up to date, you may not be able to execute trades or have guaranteed stability. If you do not have the minimum required operating system for Windows.

As always, feel free to contact info@darwinex.com if you have any questions or need a solution for this change!

And the DarwinIA winners are…

3 July 2017

The June edition of our DarwinIA trading challenge came to its end. Below you can find the 48 winners of our € 4,000,000 notional allocation for a 6 month period. Place DARWIN June’s notional allocation 1st UEI € 300,000.00 2nd VQB € 250,000.00 3rd JKC € 210,000.00 4th XIN € 170,000.00 5th DZL € 150,000.00 6th […]

The June edition of our DarwinIA trading challenge came to its end. Below you can find the 48 winners of our € 4,000,000 notional allocation for a 6 month period.

Place DARWIN June’s notional allocation
1st UEI € 300,000.00
2nd VQB € 250,000.00
3rd JKC € 210,000.00
4th XIN € 170,000.00
5th DZL € 150,000.00
6th QTN € 140,000.00
7th JJP € 130,000.00
8th UYZ € 120,000.00
9th LOM € 110,000.00
10th AXF € 110,000.00
11th VQG € 110,000.00
12th MBC € 100,000.00
13th PMZ € 100,000.00
14th GPZ € 100,000.00
15th KDU € 90,000.00
16th FSB € 90,000.00
17th SRK € 90,000.00
18th NEW € 80,000.00
19th ZUV € 80,000.00
20th CLA € 80,000.00
21st ATL € 70,000.00
22nd FMT € 70,000.00
23rd DZT € 70,000.00
24th SPI € 70,000.00
25th HIB € 60,000.00
26th ICA € 60,000.00
27th MOW € 60,000.00
28th ECC € 60,000.00
29th AOF € 60,000.00
30th RSR € 60,000.00
31st LVS € 50,000.00
32nd YHN € 50,000.00
33rd LDD € 50,000.00
34th SQG € 50,000.00
35th XXR € 50,000.00
36th JZH € 50,000.00
37th RWL € 50,000.00
38th OPK € 40,000.00
39th EZX € 40,000.00
40th GDM € 40,000.00
41st KYQ € 40,000.00
42nd VCT € 40,000.00
43rd STT € 40,000.00
44th QTB € 40,000.00
45th VTJ € 30,000.00
46th CJN € 30,000.00
47th LSC € 30,000.00
48th IZT € 30,000.00

Darwinex amended trading hours (US Independence Day)

29 June 2017

Please note the amended Darwinex trading hours for the upcoming US Independence Day holiday on 3 & 4 July 2017 (all times are in UK time).  Instrument 3 July 2017 (Mon) 4 July 2017 (Tue)  FX 22:05 Sun – 22:00 Mon 22:05 Mon – 22:00 Tue   DARWINS 22:05 Sun – 22:00 Mon 22:05 Mon – 22:00 Tue   COMMODITIES […]

Please note the amended Darwinex trading hours for the upcoming US Independence Day holiday on 3 & 4 July 2017 (all times are in UK time).

 Instrument 3 July 2017 (Mon) 4 July 2017 (Tue)
 FX 22:05 Sun – 22:00 Mon 22:05 Mon – 22:00 Tue
  DARWINS 22:05 Sun – 22:00 Mon 22:05 Mon – 22:00 Tue
 

COMMODITIES

   
Gold* 23:01 Sun – 21:59 Mon 23:01 Mon – 18:00 Tue
Silver* 23:00 Sun – 22:00 Mon 23:00 Mon – 18:00 Tue
Platinum* 23:00 Sun – 22:00 Mon 23:00 Mon – 18:00 Tue
Palladium* 23:00 Sun – 22:00 Mon 23:00 Mon – 18:00 Tue
US Crude* 23:00 Sun – 22:00 Mon 23:00 Mon – 17:45 Tue
Natural Gas* 23:00 Sun – 22:00 Mon 23:00 Mon – 17:45 Tue
 

 INDICES

 
Australia 200 23:00 Sun – 22:00 Mon 23:00 Mon – 22:00 Tue
 Europe 50 23:00 Sun – 22:00 Mon 23:00 Mon – 22:00 Tue
France 40 23:00 Sun – 22:00 Mon 23:00 Mon – 22:00 Tue
Germany 30 07:00m – 21:00 07:00m – 21:00
Spain 35 07:00m – 19:00 07:00m – 19:00
Japan 225* 23:00 Sun – 18:15 Mon 23:00 Mon – 18:00 Tue
 UK 100 23:00 Sun – 22:00 Mon 23:00 Mon – 22:00 Tue
 US SPX 500* 23:00 Sun – 18:15 Mon  23:00 Mon – 18:00 Tue
 US Tech 100* 23:00 Sun – 18:15 Mon  23:00 Mon – 18:00 Tue
Wall Street 30* 23:00 Sun – 18:15 Mon  23:00 Mon – 18:00 Tue
*Amended Darwinex trading hours.

 

As always, at info@darwinex.com we’ll be happy to assist you!

High volatility expected due to RBNZ Interest Rate decision today

21 June 2017

The Reserve Bank of New Zealand is releasing its Interest Rate Decision today (21 June 2017) at 21:00 GMT. As you may recall, trading is disabled from 20:59:59 to 21:01:00 GMT due to the low liquidity available on rollover, so please bear in mind that you won’t be able to open / close trades from […]

The Reserve Bank of New Zealand is releasing its Interest Rate Decision today (21 June 2017) at 21:00 GMT.

As you may recall, trading is disabled from 20:59:59 to 21:01:00 GMT due to the low liquidity available on rollover, so please bear in mind that you won’t be able to open / close trades from 20:59:59 to 21:01:00 GMT during this volatile news release.

When setting your SL / TP, kindly note that large gaps are expected when trading resumes at 21:01:00 GMT.

Please do not hesitate to contact us at info@darwinex.com should you need assistance.

Darwinex at Forex Day 2017

19 June 2017

In what is becoming a tradition, this year we again were in attendance at The ForexDay on 9th-10th June in Madrid. As in previous years, the event lasted for two days: on the first day (Friday 9th June), the organisers gave a trading course (for a fee) which ended with an international trading contest. On […]

In what is becoming a tradition, this year we again were in attendance at The ForexDay on 9th-10th June in Madrid.

As in previous years, the event lasted for two days: on the first day (Friday 9th June), the organisers gave a trading course (for a fee) which ended with an international trading contest. On the second day (Saturday 10th June), there were presentations about trading on two stages in the Official College of Architexts in Madrid, Spain (you can see the event programme here).

International trading contest (9th June)

This year, the international trading contest participants were Rob Hoffman, Davide Biocchi and Tarek Elmarhri. As well as being a great trader, Tarek is the Darwinex Ambassador for France, so you can imagine who we were rooting for…and as the good trader that he is there are no prizes for guessing who won 😉

And the winner is… Tarek, of course!You can see an interview with Tarek here (apologies for the poor sound quality).

General Public Event (10th June)

On Saturday, at 9 am, the doors opened for the general public event.  As in previous years, we were surprised by the amount of people queuing at the door to attend the event.  From Darwinex we want to congratulate the organisers for how well everything turned out.

The Trading Conferences soon got underway on the stages, including the conference that we had prepared.

Darwinex Conference (Expo Stage)

At 12.30 am the first Darwinex conference took place: ‘Independent trader experiences – their day-to-day trading’, in the which Mallku, Riddick and Mimago shared their experiences as traders (with their proven track records).

Mallku, Riddick and Mimago on stage

 

As can be seen in the photos, the room was filled to capacity… we actually had to leave the stage without answering all the questions so the next speakers did not run out of time! You can see a video of the conference here (NB: the conference starts at 2:19.40).

At Darwinex, we wish to thank all those in attendance because it was a pleasure to have you all there!

Darwinex Conference (International  Stage)

Following on the success of the conference in the Expo Stage, we then held another Darwinex Conference in the Sala Panorámica. As the in previous conference, the theme was ‘Independent trader experiences – their day-to-day trading’. This time the guest speakers were Integracore2, VPSEnry, ChicksFX and Mallku. Once again the Conference was a success and many of those in the audience approached out stand to ask us about Darwinex, DARWINs, DarwinIA, etc.

You can watch a recording of the conference here.

Also, you can watch interview carried out by ForexDay with some of the participants on their Youtube channel.

Event Highlights

Having come this far, it is fair to say that the event was a success: Tarek won the international trading contest, the conferences offered by our traders filled to capacity both halls (the conferences ended up with standing room only due to such a high attendance!)

Nevertheless, this does not explain why the event was such a big success for us: what really put such a big smile on our faces that day was all the traders and investors that visited us at our stand: as well as Mallku, Riddick, Mimago, Integracore2, VPSEnry and ChicksFX, who were in attendance as guest speakers, we had the enormous please of speaking with Yofxtrader, ElQuantitativo, Chema01, MCFD, Pedroml and GlobalMarkets, amongst many others. We offer you all our most sincere thanks. We attended ForexDay in 2013 as guest and we never could have imagined the amount of great traders (and great people) that would end up becoming part of this traders’ movement a few years later… and the best is yet to come!

SEE YOU NEXT TIME!

PS: According to our friends the best part of the day were the post-event drinks! 

Volatility expected due to UK general election

7 June 2017

Please note that high volatility is expected on GBP, EUR, CHF pairs as well as on UK and European indices on Thursday (8 June 2017) due to the UK general election. Also, liquidity providers are expected to significantly limit their liquidity, which can give rise to abnormal widening of spreads, potential increased amounts of slippage on executed orders and, eventually, […]

Please note that high volatility is expected on GBP, EUR, CHF pairs as well as on UK and European indices on Thursday (8 June 2017) due to the UK general election. Also, liquidity providers are expected to significantly limit their liquidity, which can give rise to abnormal widening of spreads, potential increased amounts of slippage on executed orders and, eventually, gaps in the charts due to the low liquidity available. If you plan to keep open trades on Thursday, please make sure you post margin / equity in your account ahead as volatility is expected to increase, especially around market close at 22:00 (UK time) on Thursday.

We reserve the right to change our margin requirements as we move closer to the election / depending on the outcome. Should we decide to introduce any changes to our trading conditions, we’ll endeavour to contact you via email, MT4 or by changes made to our blog / website ASAP.

D-Leverage & Risk Manager

Further, our Risk Manager will be more restrictive when replicating DARWINS’ trades to protect investors from increased volatility owed to the election.

As always, please do not hesitate to contact us at info@darwinex.com for support.