Reminiscing About the EUR/CHF Flash Crash
Direct from the desk of Dane Williams.
Yesterday I wrote a piece for a copywriting client, where I mentioned the EUR/CHF flash crash.
It was an infamous day that will live on in forex trading folklore, essentially changing the retail forex broker industry forever.
Let's go over what happened and why it was such a game-changer.
SNB's 1.20 EUR/CHF Peg
For over 3 years the Swiss National Bank (SNB) had maintained a price peg of 1.20 EUR/CHF.
So while the market saw the CHF as a much stronger currency than the EUR, the SNB would intervene on any sell orders in the pair below that level.
Using the insanely large war chest of CHF reserves they'd built up to defend the price.
But everyone gets sick of flushing money down the toilet eventually and on the 15th of January, the SNB stopped selling and removed the peg.
Without telling anyone...
They had even released a statement saying that they would continue to support the peg just days earlier, meaning the market was caught completely off guard.
So this happened.
EUR/CHF Weekly (from 2014):
SNB Removes the Peg
Complete and utter carnage in EUR/CHF.
I don't have the data on mt MT4 charts now 6 years on, but that's a 2000 pip weekly candle.
Instantly EUR/CHF dropped 30%.
If you were long the pair on leverage with your retail forex broker, then essentially no matter the size of your account, you were margin called.
The thing is, you didn't get to sell at a price your stop loss was set, or even at a price that would only take your account to $0.
With literally no buy orders in the underlying market to sell to, traders were slipped...
...and slipped.
...and slipped!
Their stop or orders to close out their positions were executed at such bad prices, they were left owing their retail forex broker money.
You know those warnings that say you can lose more than your initial investment trading retail forex?
Well, this was an example of that in action and regular-Joe traders got FUCKED.
IG and FXCM's Handling of the Flash Crash
IG Markets and FXCM are two forex brokers that you will no doubt have heard of and most likely trust.
But their handling of the EUR/CHF flash crash can be described as incompetent, all the way through to downright fraudulent.
Depending on who you ask and if they lost their life savings during the crash.
FXCM immediately executed $200 million of orders between 1.20 and 1.17 EUR/CHF.
The remaining $1 billion of orders were then filled all the way down between $1.04 and $1.02 EUR/CHF.
IG on the other hand, didn't execute any orders immediately.
They claim the liquidity wasn't there, but FXCM and their liquidity providers had no problem filling the orders.
That's literally what they're there for.
After 10 minutes had passed, IG started executing their orders.
By this stage, price was at 0.92 where they filled clients' orders and passed the bill onto them.
Retail Forex Trading Industry Changed Forever
After that day the retail forex trading industry was never the same.
FXCM essentially went bust, being taken over by a company called Leucadia at the time who essentially absorbed the broker's debts.
IG had the capital on hand to withstand the losses, but lost millions from the EUR/CHF flash crash debacle.
Regular-Joe traders were never going be able to pay back what they now owed the brokers and after the legal battles began, settlements were soon reached.
Regulators moved to limit the leverage available for retail traders, but all this has done is widened the regulated broker v bucketshop divide.
Traders who want to gamble on leverage are going to find a way and there is a multitude of unregulated, offshore brokers who will be happy to take that business.
Best of probabilities to you,
Dane.
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