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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.

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UK Parliament Vote on EU Withdrawal Bill (11 December 2018)

9 December 2018

We would like to remind you that the UK Parliament will vote on the EU Withdrawal Bill on 11th December 2018. There is a high degree of uncertainty as to the outcome of the vote and all GBP currency crosses are likely to experience significant volatility with increased risk of market gaps. It is important that you […]

We would like to remind you that the UK Parliament will vote on the EU Withdrawal Bill on 11th December 2018.

There is a high degree of uncertainty as to the outcome of the vote and all GBP currency crosses are likely to experience significant volatility with increased risk of market gaps.

It is important that you have sufficient margin coverage and are comfortable with the exposure on your account as our margin requirements may change going into the vote or depending on the outcome of the vote.

Please feel free to contact us at info@darwinex.com should you need assistance in this regard.

Amended Trading Hours US National Day of Mourning on December 5th 2018

4 December 2018

Please note the amended Darwinex trading hours for the upcoming US National Day of Mourning on December 5th 2018. All times are in UK (GMT+0) time.    Instrument December 5th 2018  INDICES    US SPX 500 23:00 Tue – 14:45 Wed  US Tech 100 23:00 Tue – 14:45 Wed Wall Street 30 23:00 Tue – 14:45 Wed […]

Please note the amended Darwinex trading hours for the upcoming US National Day of Mourning on December 5th 2018. All times are in UK (GMT+0) time.


 

 Instrument December 5th 2018
 INDICES  
 US SPX 500 23:00 Tue – 14:45 Wed
 US Tech 100 23:00 Tue – 14:45 Wed
Wall Street 30 23:00 Tue – 14:45 Wed
 STOCKS  
US Stocks CLOSED

 


The rest of the assets will trade according to their usual trading time. As always, at info@darwinex.com we’ll be happy to assist you!

Amended Trading Hours for the 2018 US Thanksgiving Holidays (Nov. 22nd and 23rd)

20 November 2018

Please note the amended Darwinex trading hours for the upcoming US Thanksgiving holiday period on 22nd and 23rd of November 2018. All times are in UK (GMT+0) time.    Instrument November 22nd 2018 November 23rd 2018  COMMODITIES     Gold 23:01 Wed – 17:59 Thu 23:01 Thu – 18:40 Fri Silver 23:00 Wed – 17:59 Thu 23:00 Thu – […]

Please note the amended Darwinex trading hours for the upcoming US Thanksgiving holiday period on 22nd and 23rd of November 2018. All times are in UK (GMT+0) time.

 


 Instrument November 22nd 2018 November 23rd 2018
 COMMODITIES    
Gold 23:01 Wed – 17:59 Thu 23:01 Thu – 18:40 Fri
Silver 23:00 Wed – 17:59 Thu 23:00 Thu – 18:40 Fri
Platinum 23:00 Wed – 17:59 Thu 23:00 Thu – 18:40 Fri
Palladium 23:00 Wed – 17:59 Thu 23:00 Thu – 18:40 Fri
US Crude 23:00 Wed – 17:44 Thu 23:00 Thu – 17:25 Fri
Natural Gas 23:00 Wed – 17:44 Thu 23:00 Thu – 17:25 Fri
 INDICES    
Japan 225 23:00 Wed – 17:59 Thu  23:00 Thu – 18:10 Fri 
 US SPX 500 23:00 Wed – 17:59 Thu 23:00 Thu – 18:10 Fri 
 US Tech 100 23:00 Wed – 17:59 Thu 23:00 Thu – 18:10 Fri 
Wall Street 30 23:00 Wed – 17:59 Thu 23:00 Thu – 18:10 Fri 
 STOCKS    
US Stocks CLOSED 14:31 Fri – 17:59 Fri 

 

The rest of the assets will trade according to their usual trading time. As always, at info@darwinex.com we’ll be happy to assist you!

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Bitcoin Cash (XBNUSD) trading suspended until further notice

7 November 2018

The BCH fork on November 15th may create a split in the BCH instrument resulting in two currencies, BCH and BSV. Due to the uncertainly around this event, at Darwinex we’ve decided to suspend opening of any new XBNUSD trades with immediate effect.

As traders trading cryptocurrency CFDs sure know, the BCH fork on November 15th may create a split in the BCH instrument (XBNUSD as provided by our liquidity provider LMAX) resulting in two currencies, BCH and BSV.

Due to the uncertainly around this event, at Darwinex we’ve decided to suspend opening of any new XBNUSD trades with immediate effect.

We’ll contact Darwinex traders with open positions in XBNUSD and recommend them to close their positions because as of November 15th our liquidity provider will stop offering liquidity for XBNUSD for an unknown period of time.

For any questions, please contact us at info@darwinex.com.

End of Daylight Saving Time in Europe (October 28th 2018)

22 October 2018

Please note that Daylight Saving Time ends in Europe on Sunday October 28th 2018 but our MT4 nd MT5 servers’ time is NOT changing until Sunday November 4th 2018 (when Daylight Saving Time ends in the US). This means that there will be 1 week (October 28th through November 2nd) where some markets will open 1 hour earlier than […]

Please note that Daylight Saving Time ends in Europe on Sunday October 28th 2018 but our MT4 nd MT5 servers’ time is NOT changing until Sunday November 4th 2018 (when Daylight Saving Time ends in the US).

This means that there will be 1 week (October 28th through November 2nd) where some markets will open 1 hour earlier than during European Daylight Saving Time (i.e. FX market will open at 21:01 GMT; commodities will open at 22:01 GMT, etc.).

 

Instrument Trading Hours in GMT
FX 21:05 Sun – 20:55 Fri (except 21:00 – 21:01 daily) 
DARWINS 21:05 Sun – 21:00 Fri (except 21:00 – 21:01 daily)
COMMODITIES  
Gold 22:01 Sun – 20:55 Fri (except 20:59 – 22:01 daily)
Silver 22:00 Sun – 20:55 Fri (except 21:00 – 22:00 daily)
Platinum 22:00 Sun – 20:55 Fri (except 21:00 – 22:00 daily)
Palladium 22:00 Sun – 20:55 Fri (except 21:00 – 22:00 daily)
US Crude 22:00 Sun – 20:55 Fri (except 21:00 – 22:00 daily)
Natural Gas 22:00 Sun – 20:55 Fri (except 21:00 – 22:00 daily)
INDICES  
Australia 200 22:00 Sun – 20:55 Fri (except 21:00 – 22:00 daily)
Europe 50 22:00 Sun – 20:55 Fri (except 21:00 – 22:00 daily)
France 40 22:00 Sun – 20:55 Fri (except 21:00 – 22:00 daily)
Germany 30 07:00 – 21:00 (Mon – Fri)
Spain 35 07:00 – 19:00 (Mon – Fri)
Japan 225 22:00 Sun – 20:55 Fri (except 21:00 – 22:00 daily)
UK 100 22:00 Sun – 20:55 Fri (except 21:00 – 22:00 daily)
US SPX 500 22:00 Sun – 20:55 Fri (except 21:00 – 22:00 daily)
US Tech 100 22:00 Sun – 20:55 Fri (except 21:00 – 22:00 daily)
Wall Street 30 22:00 Sun – 20:55 Fri (except 21:00 – 22:00 daily)
US STOCKS 13:31 -19:59 (Mon – Fri)
CRYPTOCURRENCIES 22:00 Sun – 20:55 Fri (except 21:00 – 22:00 daily)

 

Trading hours will return to normal on Sunday November 4th 2018, allowing for the daily candle to close at the end of trading in New York each day which is widely considered the end of the trading day.

As always, at info@darwinex.com we’ll be glad to assist you with any question you may have!

 

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Starting October 24th, Fx and XAUUSD swaps will be charged in triple size on Wednesdays

16 October 2018

Please be informed that starting on Wednesday, October 24th 2018, Fx and XAUUSD swaps will be charged in triple size on Wednesdays (instead of Thursdays). Below you can find a brief summary of the different swaps charges for the assets we offer.    Instrument Swaps  FX Daily at 17:00 NY City time (in triple size on […]

Please be informed that starting on Wednesday, October 24th 2018, Fx and XAUUSD swaps will be charged in triple size on Wednesdays (instead of Thursdays).

Below you can find a brief summary of the different swaps charges for the assets we offer.

 


 Instrument Swaps 
FX Daily at 17:00 NY City time (in triple size on Wednesdays*)

Exceptions: USD/CAD and USD/TRY, charged triple size on Thursdays.

Commodities
Gold (XAUUSD) Daily at 17:00 NY City time (in triple size on Wednesdays*)
Rest of Commodities Daily at 17:00 NY City time (in triple size on Wednesdays)
Indices Daily on market close (in triple size on Fridays)
Stocks Daily on market close (in triple size on Fridays)
Cryptocurrencies Daily 17:00 NY City time (in triple size on Thursdays)

*Starting on Wednesday, October 24th 2018.

 

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

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73 % of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.