On January 15, 2015, the Swiss National Bank used one of its regular monetary policy announcements to reveal at 9.30 a.m. that it would be unexpectedly discontinuing its minimum exchange rate policy — a move that sent financial markets into a frenzy.
For three and a half years, the Swiss had kept the franc deliberately weak, making sure €1 could buy at least 1.20 francs. Not any more.
The sudden move sent the currency booming, and within 20 minutes the value of the euro plummeted against the newly strong franc.
At one point less than an hour after the SNB moved, €1 fetched only 0.85 francs, a price crash of 29%.
10 minutes of hell — and no trades
And for hundreds of clients at IG, a retail foreign exchange broker, the move was enough to send them deep into negative territory, losing far more money than they’d ever put down in the first place — some say their negative balances now run to more than the value of their homes.
The SNB move plunged all their accounts into 10 minutes of hell. As the franc soared, and their bets that it would stay weak went sour, IG didn’t (or couldn’t) sell their positions, costing them millions. As the minutes ticked agonisingly by, and their positions went unsold, it wiped them out — losing them a fortune.
IG’s potential £30 million losses pale in comparison to others: FXCM, Interactive Brokers, Barclays, Deutsche Bank and Citi lost about £500 million collectively, and the total bill to retail investors almost certainly runs into the many billions.
Retail foreign currency exchange (FX) investing is a market that most ordinary, inactive investors don’t get involved in. Many people invest in stocks, but trading on currency shifts day to day is complicated. Yet FX trading is advertised to amateur investors in TV and Internet ads, and on the front of football team shirts. There’s a huge spectrum of experience — some have or still do work professionally in finance, while some have no experience at all. It attracts some people who seem obviously ill-equipped to dabble in the market.
In that frenzied 10-minute space on January 15, however, as the value of the euro crashed against the exploding franc, amateurs and professionals clients alike at IG watched in horror as they tried to exit their trades, and IG didn’t fill them.
Leverage that magnified losses by 100 times or more
In other financial markets, a move of 29% would still be massive, but perhaps not one which makes or breaks livelihoods. Currency markets are a little different. Typical currency moves are so small that it’s impossible to make (or lose) much money in a single day — a 2% shift in a day is considered relatively dramatic.
Retail foreign currency exchange (FX) clients are normally offered “leverage” by brokerages in order to magnify those tiny margins into something worth trading. Leverage is essentially borrowed money that investors can use to bet. They must pay it back to the lender.
In the case of IG, leverage of 100:1 was offered for Swiss franc trades (it’s higher for many other currency pairs). That let investors place a 100,000 euro bet with only 1,000 euros of their own money. A 2% move in the investor’s favour will generate 2,000 euros in profits (2% of 100,000 euros = 2,000 euros). That underlying bet has now turned 1,000 euros into 2,000 euros — the investor has doubled their money even though the change in currency value was only 2%.
But leverage also works against an investor: any accumulated losses can run to vast amounts more than was originally deposited.
That 100:1 leverage offered by IG was also called a 1% margin. Some retail brokers had raised their margin before the move: For example, Saxo Bank hiked margins from 2% to 8% in September, meaning leverage of more like 25:2. IG insists that its margins were consistent with other brokers in the industry.
There are barely any examples in modern history of an advanced currency moving as fast as the Swiss franc did on January 15. So most of the time that enormous leverage is safe — until it’s not. When a currency does make an enormous move, it can wipe out investors. Of course, if that position’s value fell by 30% (as the Swiss franc did on January 15), the losses on a 1,000 euro stake would run to about 30,000 euros — or 30 times higher than the 1,000 euros that was originally deposited.
And some version of that is true for about 200 clients of IG Group, who now owe IG £18.4 million combined. Some of the day traders now have negative positions they say are higher than their entire personal net worth — meaning they would have to sell their houses to pay them off.
I spoke to some of the investors holding out and refusing to pay their negative balances. Many think IG is to blame for how badly their bets turned out.
“A massive failure of the platform”
They think that IG failed to give them the “best execution” that the Financial Conduct Authority (FCA) demands.
One client called IG’s performance “a massive failure of the platform.”
Many traders had been effectively betting that the franc would be falling in value — and that 1 euro would fetch at least 1.20 francs or more as time went by. So when the franc gained strength, and moved in the wrong direction, their account balances went with it.
Some brokers have forgiven the negative balances of their clients, but they are under no obligation to do that. IG Group is still pursuing clients with negative balances, but conceded in its earnings results last month that “the majority of remaining debtors may not be in a financial position to clear their debt in full.”
These investors knew they were on the hook if their bets went wrong, but they believe that IG’s performance exacerbated their losses. They say that they placed sell orders on their positions that could have been filled pretty much instantly, but for 10 agonising minutes — as the franc dived through the biggest currency collapse in four decades — IG froze up.
IG, unsurprisingly, disagrees.
“Some of these people should never have been given access to that sort of leverage”
“There are some people who legitimately got hosed — people on low incomes who lost hundreds of thousands of pounds — so there’s a regulatory case here. Some of these people should never have been given access to that sort of leverage,” one IG client told Business Insider.
“Some guys literally had zero credit checks.”
But the client said his “biggest gripe” isn’t with offering too much leverage — which would be a market-wide regulatory issue. For the group of clients with professional experience, the concern is with the 10 minute gap that emerged between the SNB’s move and when IG began aggregating many clients’ “sell” orders.
After some of those orders to sell (or “stops,” in FX jargon) were executed automatically, IG’s electronic systems effectively halted. The rest of the orders were aggregated and IG traders (along with those at other brokers around the world) were left scrambling. They had to phone around to try and execute trades — looking for anyone who’d take the other side. Many clients had stops — orders to their broker to execute a trade — just below the €1.20 mark. Typically if an investor has a stop, the broker trades when the currency drops below (or rises above) that level, to limit their losses.
IG says that the clients who lost money did not have stop orders that were guaranteed to investors, and that practically no one anywhere was willing to take the other side of the trade when the SNB moved.
And that’s where the more experienced clients have a problem.
One of the hold-out clients says: “We got filled at 92 (€0.92). 115 million orders didn’t begin to be executed until 10 minutes after the SNB moved.”
“I’ve seen wars, defaults and crises. This was the worst bit of trading I’ve ever seen in my life”
“I’ve worked in finance, I’ve seen wars, defaults and crises. This was the worst bit of trading I’ve ever seen in my life. Our biggest gripe is with IG. They’re selling a platform that doesn’t do what it says.”
FXCM, a US-based foreign exchange broker, published detailed data on the action that it took on the day. The statement says that it “executed approximately 200 million in total volume before 4:30:56 in the 1.17 to 1.20 range” — the clients say that amount executed within the first minute is larger than the total amount that IG executed in the next 45 minutes. The broker executed their remaining orders at €1.05, €0.13 higher than IG.
The client added: “IG say there wasn’t any liquidity. If that’s the case, how did others trade? FXCM gave a blow-by-blow account. They’d traded 200 million within a minute, and IG didn’t start for 10. Who are IG’s liquidity providers? The major banks managed to trade — does IG not have relationships with them?”
The CEO of FxPro, another broker, told Finance Magnates in February that it managed an average fill of 1.11 — much higher than IG, too.
All brokers have argued that the market was extremely illiquid. But IG seems to have got some the worst prices — at least of the ones that have been made public. Was that just bad luck, or a failing on their part?
When I spoke to Keiran McKinney, head of investor relations at IG, he rejected the charge that IG didn’t have adequate relationships with liquidity providers, reeling off the names of more than 10 global investment banks.
“Given our scale, we have a greater number of liquidity providers than most providers in our industry — we sought and found liquidity where it existed between 9:30 a.m and 10 a.m on the day and filled the orders as sufficient liquidity became available,” McKinney said.
He went on: “The issue was illiquidity, not the size of the move. It would be wrong to say there was no liquidity at all — there were pockets but it was extremely illiquid. This was a unique event in our lifetime.”
IG says that it aggregated the orders so that there was no unfair disparity — that if they had tried to execute the orders piece by piece, some clients would have got much better deals than others simply by luck. IG hasn’t released a detailed breakdown of precisely what orders were executed and when.
“It is fair to say that the atmosphere was tense”
When those aggregated orders were closed out, the Swiss franc had dropped to just €0.925 — of course, at the time there was little way of telling where the currency was going to settle. It could have plunged further.
But it didn’t.
In fact the currency then bounced back above €1 just minutes later (right now, it’s at €1.048). It’s clear that waiting longer would have meant smaller losses for IG’s clients — though it was impossible to know that at the time.
FXCM say most of their own clients were able to get out of their positions at around €1.02 to €1.04. That may not sound like such a big gap with IG’s €0.925, but at 100:1 leverage, the divergence was massive for many clients.
McKinney says the situation on the day was “organised but sense,” insisting that the firm behaved no differently to other brokers.
“IG has clear procedures to deal with this sort of incident and these worked well on this day. It is fair to say that the atmosphere was tense as we searched for and found the required level of liquidity to fully close out client positions,” he added.
“All our systems and all the systems in the industry are built with the assumption that there’s a level of liquidity. This was the worst scenario we had ever seen in a major global currency in our 40 year history, but ultimately it’s an industry-wide issue.”
The Financial Conduct Authority doesn’t comment on ongoing investigations so it’s not clear that IG specifically is being investigated. But we do know that the FCA says it’s looking into the surge in the Swiss franc generally as part of its oversight into the issue.
If there is a more focused investigation, the FCA may want to see the precise step-by-step details of precisely what happened and when — a move that could give the clients and their broker some closure, for better or worse.