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Negative account balances

  • Post #1
  • Quote
  • First Post: May 23, 2021 12:47am May 23, 2021 12:47am
A question for brokers and knowledgeable traders.

I realise some accounts have negative account balance protection but I am curious to know when do negative account balances occur?

If a trader:

  1. doesn’t hold positions over the weekend,
  2. doesn’t hold positions at rollover,
  3. doesn’t hold positions at major scheduled news events,
  4. and employs stop orders,

when is an account at risk of a negative balance?

I assume it’s only when liquidity suddenly and unexpectedly dries up, such as if a surprise news event enters the market, and prices move aggressively against you causing significant slippage.

Is that correct, or are there other causes of negative account balances?

Quoting Le.Metier
A question for brokers and knowledgeable traders. I realise some accounts have negative account balance protection but I am curious to know when do negative account balances occur? If a trader: doesn’t hold positions over the weekend, doesn’t hold positions at rollover, doesn’t hold positions at major scheduled news events, and employs stop orders, when is an account at risk of a negative balance? I assume it’s only when liquidity suddenly and unexpectedly dries up, such as if a surprise news event enters the market, and prices move aggressively...

Google snb crisis 2015.

Stop orders and margin calls failed to work because it happened so quickly and there were no bids in sight. Because no one at the instituitional level knew how to price it
Quoting Bicarus
{quote} Google snb crisis 2015. Stop orders and margin calls failed to work because it happened so quickly and there were no bids in sight. Because no one at the instituitional level knew how to price it

yes that was clearly a liquidity issue

the market also had an awareness of something fishy weeks (months) before the announcement, given EURCHF ADR was 10pips, sometimes less. Any retailer paying attention could see the charts were signalling stay away from CHF

nevertheless, are illiquid markets the only cause of negative balances? I would like to open a highly leveraged account and want to understand what causes negative balances.
Negative balances happen only where there is a gap event where a broker cannot execute a stop or liquidate an account due to margin call at a price that would not cause a loss beyond the balance on the account.

you are correct in your assumptions in that you can significantly reduce the likelihood of a gap event by avoiding weekends etc. but it can still happen.

the most famous gap event that seriously hurt traders and took down some brokerages was the Swiss nation bank event in 2017, here is a link to a story about it:

https://www.leaprate.com/news/how-fo...h-infographic/

but as you say retail clients are protected from negative balances in a number of jurisdictions now.
Sorry 2015.. not 2017..
Quoting lukehandcool
the most famous gap event that seriously hurt traders and took down some brokerages was the Swiss nation bank event in 2015
yes, but easily avoided as mentioned in my previous post
Quoting Le.Metier
{quote} yes, but easily avoided as mentioned in my previous post
it is avoidable. but not everyone employs these risk measures + black swan are basicially unpredictable by nature.

key take away is that clients monies are pooled together. if 50% of a broker's clients are in debt. the other 50% that avoided the black swan are not safe.
Black swan event can cause it.
This is why reputable financial regulators like the UK's FCA and the German BAFIN make it obligatory for brokers to provide negative balance protections. It really matters where a broker is regulated and what kind of license it has. Having a license in an offshore zone somewhere is not the same as having an FCA license or a EU regulator license.
Exatly question I would ask. When I trade forex I am allways somehow afraid even if my broker have negative account balance protection because when I research what happen with EUR/CHF in 2015 when traders loss all your funds it is somehow scary, but proper MM 1% per trade or even smaller can save if something like that happens again
I am also wondering if a trader has an account loss leading to a negative account, if the total negative is less than $1000, the balance will be returned to zero, but if unfortunately the loss is negative -5000 $, the broker will cover the loss. negative balance?
Should the broker accept losses?
I think negative balance because trader use high leverage and the market move in the high volatility market
because automatic stop out not work due freeze account, then end with a negative balance.
A trader doesn't get a negative balance in the given situations. If we have applied a bonus to our trading account and we lose all our initial deposits, then the balance goes negative. It is what I have experienced from my trading accounts. That is why you need to be secure about your deposits and make judicious use of bonuses for a specific period. No doubt, this bonus will give you an additional margin, but it will not protect your initial deposits from falling to the stop out level.
  • Post #13
  • Quote
  • Last Post: Nov 11, 2021 2:43am Nov 11, 2021 2:43am
if the broker provides negative balance protection, it'll only exist or take action once the account actually stops out and loses more than the initial balance. So if your account after stop out still has some money then the broker does not need to activate the balance protection.
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