DislikedJustin,
Tonight, I've proceeded to open an account with EFX using the online forms. As I was filling it out, I ran into this statement:
I know that many brokers offer margin protection. In otherwords, a client cannot lose more money than he/she deposits in the account. If the market moves against her, she'd get a margin call BEFORE the balance goes to $0. If she doesn't deposit more money into the account, then the broker liquidates her position, saving her balance from going into the negative.
By the quoted statement above, am I correct in reading that EFX does NOT offer margin protection, and that I COULD lose more money than the total amount that's deposited into my account? If I'm reading this correctly, can you tell me why EFX/MBT doesn't offer margin protection when so many of your competitors do? If I'm wrong, can you point me to something in writing about the margin protection for EFX/MBT?
Thanks,
DahliaIgnored
It comes down to understanding the difference between a deal desk and a non-deal desk. Let me explain it this way.
If you are trading through a deal desk, you open an account for $10,000 (example). You trade, and they take the opposite side of every trade. If you lose $10,000, they probably made it. So it’s easy for them to state that your account can’t lose more than your value. They were the other side, so they can make that statement, and they’ve made plenty of money (secret note: it isn’t about the commissions).
If you are trading through an ECN like us, you run a trade and we execute that trade through a bank and charge you a fee. We can’t guarantee anything beyond that. Just stop and think about what “margin protection” the way that you are describing it means.
For example, what if you go long 10 (1 full) EURUSD with a $1500 account and the EURUSD moves 110 pips against you. Now, your account is worth about $400. That means that if the pair moves another 40 pips against you, you are out of money. Anything more and you go under. So how can a deal desk guarantee that you can’t ever lose more than those 40 pips? If they could do that, shouldn’t they be able to prevent any slippage on any order? What happens if major news comes out and suddenly the market spikes 150 pips further? So if you have an account that can sustain it, you might get a bad fill, but if you can only afford to lose 40 pips, they can magically get the fill?
I highly suggest that people consider the implications of this. It’s simply more proof that the deal desks are trading against you. It’s basically their way of saying, in the example that I gave, “We don’t need to make more than the $10,000 you gave us.”
In a real market, you are always subject to market risk, and if you use margin, you are at risk of more than your investment.
With the above being said I would like to mention that we do in fact monitor our clients risk of going negative in their accounts. Typcially we will try and contact a client and request they add a protective stop or remove some if not all of their trade. If we are unable to reach the client or the market is moving to fast against the client we will do our best to manage the trade.
