When the markets plunge into chaos on the toss of a coin

The Swiss abandoned the cap on the value of the franc and suddenly there was panic from New York to West Ham

Click to follow
The Independent Online

The Swiss central bank’s stunning Thursday U-turn when it abandoned the euro cap on the Swiss franc that kept it at €1.20 has exacted a brutal toll on currency brokers, banks, spread-betting firms and one east London Premier League football club.

As the reverberations from the move continued to play havoc on the markets, West Ham United was seeking a new name to splash across its shirts after its “proud principal sponsor” – the  currency broker Alpari – shut down its UK operations due to losses sustained when the “Swissie”  unexpectedly shot higher.

The firm said most of its clients had lost money and, with many being unable to cover their positions, it was left holding a bust baby.

Then came IG. The spread-betting industry’s top gun said it faced losses of “up to” £30m. Peter Cruddas, founder of rival CMC Markets, said his firm had suffered “some losses”, while the Capital Spreads owner London Capital Group could lose up to £1.7m.

But the contagion went far beyond London. The New York-listed FXCM, which handled $1.4trn in trades in the last quarter of 2014, took a $225m (£148m) hit. The shares collapsed, losing more than 80 per cent of their value in early trading, with reports of talks with investment bank Jefferies over a rescue. Over in New Zealand, the broker Excel shut down entirely.

Banks were also counting their losses, ranging from a reported $150m at Deutsche Bank and Citigroup to a figure in the low tens of millions at Barclays. London Central Portfolio, a residential asset manager, said Swiss-based wealth managers and potential investors are now seeking “safe haven” central London properties.

So what has caused the carnage? In theory, currency trading and spread-betting should be a relatively low-risk business. If an excess of your clients are backing a currency (like the Swiss franc) to fall, then you “hedge” the position by making a similar bet yourself, so you have the money to pay them if they win. If they lose, they pay you, covering your own losses.

The firm makes a profit from fees, commissions, and the gap or “spread” between the price at which a client places a “buy” bet on a currency to rise and the price of a “sell” bet to fall.

Alpari’s apparent problem is that its clients lost so much money, they couldn’t pay when it imposed a “margin call” requiring them to cover their losses with the firm.

Some businesses may also have lost by playing punter and seeking to profit through taking their own positions in the market

A third problem for firms was created by the scale of the Swiss currency’s jump, which shattered punters’ “stop losses”. The problem with spread-betting is that losses are potentially unlimited. To protect themselves, most firms offer – and sometimes even demand their clients take out – “stop loss” positions.

Let’s say you bet the Swiss franc will fall against the euro at £10 a point. And let’s say each point is 0.1 cents. So if the franc falls by 1 cent, you win £100 (10 points times £10). However, if it rises by the same amount, you lose £100. To limit your loss to, say, £20, you would take out a “stop loss” trade, which would close out your bet were the franc to rise by 0.2 cents.

But what if the franc surged a whole cent or more in one single movement in reaction to a shock, like, for example, the cap’s abandonment? This is called a gap and it can “break” a stop loss because instead of the market ticking up or down in small price movements, it lurches sharply.

Now the spread-betting firm can choose to honour the stop - and some offer guaranteed stops protecting against such a circumstance for a fee – but that will cost it because the hedges it will have taken out won’t usually do the same thing

Kieran McKinney, head of investor relations at IG, says: “A G10 currency dislocating in this way is a once in a generation happening – a ‘black swan’ event.  The Swiss franc gained 30 per cent at its peak against the euro over a matter of minutes, without any available liquidity.  In a normal, even very fast-moving, market, a client’s non-guaranteed stop loss is triggered very close to where it was set, because there are constant price ticks as the market moves. In this case the currency gapped, there were none of the normal price ticks, and so technically client positions should have remained open until the market reopened – at an extremely different level.

“But we’ve chosen to honour our clients’ stops because it’s really not in our interests or their interests for them to burn out.”

David Buik, chief market commentator at Panmure, says that one way or another the Swiss have much to answer for: “I don’t think markets have ever been the recipient of such gross discourtesy by a central bank. The fact that the Swiss franc has lost its safe haven is probably no bad thing; it was just the manner it was conducted by the authorities left a great deal to be desired.”

Many will sympathise with that view.

Glacier cracks spread - Swiss crisis: Day 2

Tourism in meltdown

The Swiss tourism PR machine went into overdrive – not to stop foreigners cancelling their holidays, which would be pointless, but to persuade locals not to flee. “Swiss people! Take your holidays in Switzerland!” said the boss of the tourist office.

Swiss break for the border

Local authorities in Basel are laying on extra tram services to Germany tomorrow – expecting a rush of cross-border shoppers looking to use their newly-muscular Swiss francs to buy goods sold in euros.

Lawyers sharpen pencils

Law firms in London and New York are said to be working on legal actions against the Swiss National Bank on behalf of clients who lost out.