Good brokers are quite rare. They must be regulated, popular and well capitalized. One of the factors to look is how they handle flash crashes. Such market crash tests the broker’s risks managements! Some broker cannot handle it. The broker I was earlier Alpari UK just folded up during SNB fiasco during Jan 2015. 2-3 other brokers also shut down. Even FXCM almost went almost bankrupt! Bottom line: Your money is always at risk!
Hi Danish,
It's important to understand why FXCM and other STP brokers had much bigger exposure to the
SNB flash crash last year than dealing desk brokers (AKA market makers). For all forex trades placed by our clients on standard FXCM accounts, we are a no dealing-desk broker and offset each trade one-for-one with our liquidity providers, and only make money on trades not customer losses.
Obviously many of our competitors who are on the opposite side of their clients trades did not find the EUR/CHF trade to be helpful to their bottom line, as they lose money when traders profit. We saw many of the dealing desk firms begin to increase overnight rollover cost as well as raise margin requirements to get these trades off their system.
At the time of the SNB announcement over 3,000 FXCM clients held slightly over $1 billion in open positions on EUR/CHF. Those same clients held approximately $80 million of collateral in their accounts. As you know this was the largest move of a major currency since currencies started floating 1971.
The EUR/CHF move was 44 standard deviation moves, while most risk management systems only contemplate 3-6 standard deviations. The move wiped out those clients account equity as well as generated negative equity balances owed to FXCM of over $225 million. We believe that the FXCM system operated properly during this event.
The caveat of our no dealing-desk execution system is that traders are offset one for one with a liquidity provider. When a client entered a EUR/CHF trade with FXCM, FXCM Inc. had an identical trade with our liquidity providers. During the historic move, liquidity became extremely scarce and shallow, which affected execution prices. This liquidity issue resulted in some clients having a negative balance.
While clients could not cover their margin call with us we still had to cover the same margin call with our banks. When a client profits in the trade FXCM gives the profits to the customer, however, when the client is not profitable on that trade FXCM Inc. ends up having to pay the liquidity provider. For anyone that still thinks FXCM is running an FX dealing desk despite stating that we provide No Dealing Desk (NDD) forex execution to all our standard accounts, we have now demonstrated that such is not the case.
Also, despite the events of 15 January 2015, FXCM's capitalization remains at levels similar to before the SNB flash crash. As of August 5, 2016, the minimum regulatory capital requirement for our worldwide operations is $61 million. However, FXCM has regulatory capital of $162 million, a surplus of $101 million. Our clients appreciate this fact, which is why the latest financial data from the CFTC show traders continue to have more money on deposit with FXCM than any other US-regulated forex broker.
