The Academy of Financial Trading - EURCHF - A Case Study

DUBLIN, Ireland, January 28, 2015 /PRNewswire/ --

There has been a huge amount of coverage regarding the decision made by the Swiss National Bank on Thursday the 15^th January 2015 and, more specifically, the action which took place immediately thereafter by all Swiss Franc currency crosses.  

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The main currency pair affected was obviously the EURCHF.  The CHF appreciated against the Euro by 30% in mere moments.  This was not just a sizeable movement. This was not just something excessive. This could not just be described as "unusual".

The Swiss National Bank had created an artificial floor in the EURCHF market at 1.20 CHF.  Each time the Euro weakened to this level, the SNB would jump in and start buying Euro.  This meant that the CHF would then weaken, and Swiss exports could remain competitive - protecting the Swiss economy.  When the SNB decided to no longer protect the 1.20 CHF level, it created a vacuum directly underneath.

No one felt the effects of this move more than the online trading brokerages - specifically the market-makers.  The extent of the damage was widely reported the following day, when an array of articles appeared in the broadsheets citing the size of the realised losses.  Both Alpari UK and Excel Markets in New Zealand were unable to continue operations.  FXCM announced that they may be in breach of their regulatory capital requirements, and their own stock price fell by over 90%.  They have since been bailed out by Leucadia, who have provided them with $300m in financing.  Even an industry stalwart like the IG Group was affected - saying that losses "will not exceed £30 million, from market and credit exposure". Further similar statements, from other brokerages, will most likely appear in due course.

In any trading environment, there has to be one winner and one loser.  One person's gain simply must be another person's loss.  Transactional costs and similar will mean that they will never be exactly equal - trading will never be a zero sum game - but they should never be significantly different.  

If it is indeed the case that, as all of these companies have stated, their clients have incurred substantial losses, then each of these companies should have had each position hedged, so as to protect themselves.  By hedging their client's positions, then they would have realised equal profits to their client's losses.  They would not, they should not, have incurred any losses.  So if the clients of these specific brokers did indeed lose, then who has gained?  

Let's ask another question.  If these brokers did indeed get hit, if they did indeed realise losses to the extent which they have publically declared, then who is likely to have won?  

We at the Academy of Financial Trading feel that there is an obvious and most likely answer.  If the brokerage suffered a loss, then it is a sure sign of two very important and equally significant events.  The first is that it is most likely irrefutable evidence that the broker was trading against their client, hence the fact that vast majority of brokerages have a licence to "Make a Market". The second major hypothesis, based upon the facts, is that it is further evidence that the retail trader overcame the odds and beat the market-making brokerage - and did so in epic proportions.  In a true "David vs Goliath" event, the little guy has won the day.  

This singular trade and the consequences experienced thereafter tells us that, while never publically declaring so, the vast majority of brokers are "Market-makers".  They do not have their clients best interests at heart as they continually trade against them.  They do this to make money - to generate revenue, much like a classic casino.  These brokers, like all revenue generating enterprises, are looking to make as money as possible.  

Let's try to explain this a different way.  If your largest local bookmaker had a huge amount of money taken in for the Grand National, and if all of their clients subsequently lost because they had placed a bet on the wrong horse - would the bookmaker make a profit or a loss?  How about if we swap it around?  If a bookmaker had a huge amount of money placed by its clients on a specific horse, and if that horse - against all the odds - romped home, then who would suffer a loss?  Why do people think that the market-maker trading industry is any different?  This shows the importance of trading with an STP broker - a company who does not trade against their clients.

We believe that every single retail trader who levelled the playing fields, who stuck to their strategies, who sold upon a technical breach of major support, and who single handed felled their foe, deserves to be recognised and congratulated.

The Academy of Financial Trading.

Source: http://www.academyft.com/

SOURCE The Academy of Financial Trading