Pound Drops 6% In Minutes. How A Broker Impacts Profit & Losses
In October 2016 a ‘so called’ 1 in 100 event occurred where over two 2 minutes the British Pound dropped 6% in just minutes. Below shows this huge drop and rebound.
There is plenty of speculation as what led to this extreme fluctuation but most experts agree that thin trading over the period helps it occur. Another factor was a negative remark from the French president about Brexit just seconds before the drop. Whether the drop was a cause then of algorithmic trading, stop-loss orders getting triggered or options been called it highlighted how fragile currency markets have become.
With currency traders planning ahead for small percentile changes rather then huge fluctuations there is a need to have safeguards to prevent safeguard against huge losses a movement like this could result in. Below examines two safeguards offered by different forex brokers.
Negative Balance Protection
Some Australian forex brokers offer different levels of negative balance protection. In theory, this means that you can’t lose more than your deposited amount. In effect, the amount you deposit with such a forex broker is a ‘cap’ on how much you can lose. Below lists a number of forex brokers and their negative balance protection policy.
1) EasyMarkets (Formally EasyForex)
EasyMarkets has the most comprehensive policy in the field. Their policy is a guaranteed negative balance protection. Their policy highlights that the onus is on them the forex broker for facilitating trades in a variety of market conditions. This means that not only does EasyMarkets takes responsibility to close a traders position when their deposit is exhausted, if this can’t be achieved they wear the difference.
Another new unique tool provided by EasyMarkets is deal cancellation. This feature allows a trader to cancel a trade within 60 minutes of placing an order. This would mean that if you were forex trading the pound in October when the fluctuation occurred, you may have been able to cancel the trade if you predicted the wrong direction.
Plus500 have a set policy that forex traders “cannot lose more than the balance on your Trading Account”. They have a similar automatic trading system that will close out a trader’s position when the margin level (maintenance level) is reached.
What makes Plus500 unique is that the margin call in some circumstances won’t occur when the maintenance margin level is reaches. This is because the forex broker may choose to allow additional time for more funds to be deposited or for the position to be closed by the trader. Naturally, if these actions are not made and the account remains in negative balance, the position will be closed at the price available on the market.
Pepperstone has negative balance protection but this is not guaranteed. Their forex trading platforms (MetaTrader4 & cTrader) have in-built systems. These systems automatically close out trades when a balance becomes zero but this isn’t guaranteed in volatile markets. This means that a traders balance can go into negative and Pepperstone will require the difference to be paid.
4) IC Markets
IC Markets has the same forex platforms as Pepperstone and have these set close out margin ‘stop out level’ requirements set at 80%. This is automated by the platforms and isn’t a guarantee by IC Markets that they will cover any negative balance scenario. It should be highlighted that in the past extreme Swiss currency event, IC Markets covered up to 80% of negative balance events incurred by their traders,
OANDA have a ‘margin closeout’ system where in Australia. Their forex platform will alert a client when signed in when a closeout value falls below 5% of the margin closeout. Another warning will be send when it falls below a 2.5% margin closeout after which the position will be closed automatically. Negative balance scenarios can occur in volatile markets and OANDA won’t cover this amount if it occurs.
6) IG Markets
IG may partially or fully close any position when a traders is at risk of negative equity if they don’t hear from the traders. Unlike the three forex brokers above, this process is not automatic and the broker assumes no responsibility to do so.
Guaranteed Stop Loss Facilities
All Australian forex brokers offer ‘stop loss’ orders which allow positions to be closed after a set profit or loss is achieved. The key issue though is an extreme even like the 6% drop in the pound over 2 minutes will make it near impossible for most platforms to close out a traders position at the set rate. While this may mean additional profits for those traders who predicted correctly the drop, it could mean huge losses for those that predicted the other way (know as slippage). The only way to remove slippage is to place a ‘guaranteed stop loss’ trade which may incur a slight fee premium.
At EasyMarkets all trades automatically come with a guaranteed stop-loss. This means that you don’t need to opt in to any additional features when you make a trade and can’t lose more that the amount set on any trade.
Plus500 offers ‘stop loss’ on all trades but a trader needs to attach a ‘guaranteed’ option to place an absolute limit on a positions absolute downside risk. This can only be placed on new trades (not existing positions) and can’t be removed or cancelled. It should be noted that spreads are increased when a trader chooses the ‘guaranteed stop’ feature increasing currency trading costs. This is previewed for the trader before approving the trade.
Pepperstone does not offer guaranteed stop loss order on any trades. It’s core focus is to maximise execution speeds to help traders achieve the price quoted even in volatile markets.
4) IC Markets
Like Pepperstone IC Markets has no guaranteed stop loss features available.
OANDA has no guaranteed stop loss feature available on any trades.
6) IG Markets
IG offer unique guaranteed stops that place a cap on traders losses. A premium is placed on these trades with a guarantee that in any situation, your price will be closed at the price specified. Like for Plus500, you can only add this feature to new trades (not existing trades). IG have flagged that this functionality though may be available in the medium term.
Conclusion To Coping With Market Fluctuations
High volatility events remind Australian forex traders just how critical forex broker safeguards can be to limit losses on currency markets. The best two safeguards are guaranteed stop loss order features and negative balance protection which are both standard for EasyMarkets. In fact, for those who have a low risk appetite or are new to currency trading, EasyMarkets is the recommended forex broker. Visit their website through the link below.