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The One Nobody Talks About

  • #1
  • First Post: Feb 10, 2009 7:34pm Feb 10, 2009 7:34pm
A recent concern of mine is a gap in price that could occur in the ECN market.Suppose you trade with high leverage, and a piece of news hits that sends the next tick a thousand pips below your stop. Automatic margin call? No.In the real market, the next tick is what you get... which can send your account into debit.How bad could it get? What if a nuke went off? What would the market do?The bottom line: who want to owe the broker $10,000 because the market gapped on them in a trade, and filled them beyond a margin call? Improbable? Yes. But theoretical and I'd like to hear thoughts on this.
  • #2
  • Feb 10, 2009 8:17pm Feb 10, 2009 8:17pm
Account can't go below 0. Because theoretically, you are only trading the money that you have.

If you don't have that money, u cant trade. Unless you are trading on lending. In that case you're an idiot to begin with. Because no one should trade with loaned money. Unfortunately this is the reason our banks are in a deep hole right now.
  • #3
  • Feb 10, 2009 8:19pm Feb 10, 2009 8:19pm
People who trade using high leverage are asking for it 1000 different ways, if this were to occur they would, at least in a sense, get what was coming to them. 95% of the trading public shouldnt even use leverage over ... say 10:1? Even that is high for my taste given my skills (or lack of?). Those who live on the edge should take this into concern. I dont believe this only can happen during a nuke as you mention, 400:1 during some shocking news release like AUD dropping the rate tomorrow to 1% could trap someone and get a negative balance.

Also, wouldnt it be sad if a nuke went off and people heard you screaming and shouting and they say "Wow, the poor man, he is really, really sick about all of those people dying, I wish I could comfort him." ... meanwhile you are screaming at your computer monitor and the -xxxxx.xx account balance, who gives a rip about what caused it?

Quoting Takisd
Account can't go below 0. Because theoretically, you are only trading the money that you have.

If you don't have that money, u cant trade. Unless you are trading on lending. In that case you're an idiot to begin with. Because no one should trade with loaned money. Unfortunately this is the reason our banks are in a deep hole right now.
In the terms and conditions for two of the three brokers I have signed up with your first sentence would not be accurate. The third, who knows what they will say if such a thing happened?
The market is my nation. Traders, my family. Hello, brothers and sisters!
  • #4
  • Feb 10, 2009 8:28pm Feb 10, 2009 8:28pm
Quoting tdion
A recent concern of mine is a gap in price that could occur in the ECN market.Suppose you trade with high leverage, and a piece of news hits that sends the next tick a thousand pips below your stop....
In futures trading, that's always been a concern.
It gets even worse.
Your market can open up/down the limit for days and you cannot get out. A person can lose everything they have or ever will have. I saw platinum do that several years ago.
  • #5
  • Feb 10, 2009 8:50pm Feb 10, 2009 8:50pm
Assuming you have stop losses on your trades. If so, then if it gaps that far down, it'll start looking for an exit to your trade. There's no telling exactly where you'll get filled, but then it's all a matter of liquidity. Most people that trade w/ higher leverage tend to trade short time frames, don't trade overnight or over the weekend, and confine their trading to times when liquidity is high. That helps to mitigate risk quite a bit since there's likely to be a counter party somewhere for an exit. But yes, there's always a possibility that liquidity could dry up and the spread could widens so far that it breaks you. That's just part of the risk leveraged traders take.
Quote
In futures trading, that's always been a concern.
No joke. Less liquidity and lock limits. Price goes up and up, way up, you decide to go long, price breaks short a bit and then boom... lock limit up. Can you say hosed? Sure... I knew you could! Good reason not to buy at the daily high or sell at the daily low, eh?
Quote
Your market can open up/down the limit for days and you cannot get out. A person can lose everything they have or ever will have. I saw platinum do that several years ago.
Nod. But that usually depends on the position size. If you're not sized too highly you can usually find someone to take the other side of a trade. But yea, you can get stuck in a very bad situation if you're not careful. Not sure why the topic is called "The One Nobody Talks About" since quite a few people do, infact, talk about this. Anyone trading across weekends over the last several months would have direct exposure to this risk.
  • #6
  • Feb 10, 2009 10:20pm Feb 10, 2009 10:20pm
Quoting billbss
In futures trading, that's always been a concern.
It gets even worse.
Your market can open up/down the limit for days and you cannot get out. A person can lose everything they have or ever will have. I saw platinum do that several years ago.
I know someone who lost, in a matter of minutes, over 200k--all the money he had in account. His partner lost much more, some of which he didn't have in account or anywhere else for that matter. Both happened at the same time--at first they thought the price spike was an error. The first guy got out at the end of his money but his partner waited a minute or two longer, then couldn't get out at all. Now you can't mention Soros around either of them.
  • #7
  • Feb 10, 2009 10:20pm Feb 10, 2009 10:20pm
if we were trading on loaned money, we would not have to make a deposit.

If a broker is charging you for negative balance, good luck them doing so if you live in a different country to them. Considering that they will have no juristiction wherever you are.

Use logic thanks. Terms and conditions are made to scare you. But in reality, unless you are in the US and trading with a US broker, or switzerland etc, where the regulations actually attempt to do something (i am sure they wont chase you up for a few bucks).

Anyone suggesting that negative balance will be chased needs a reality check.
  • #8
  • Feb 10, 2009 10:53pm Feb 10, 2009 10:53pm
Quoting Takisd
if we were trading on loaned money, we would not have to make a deposit.


Use logic thanks. Terms and conditions are made to scare you. But in reality, unless you are in the US and trading with a US broker, or switzerland etc, where the regulations actually attempt to do something (i am sure they wont chase you up for a few bucks).
Sure, trading small amounts in retail forex is relatively safe. It's unlikely you'll ever lose more than your account balance. The retail brokers are satisfied with getting your entire account and the bigger share of them only hold you responsible to the extent of your balance. And if you're a small trader it wouldn't be worth it to them to go after more. And after all, they didn't even put your trade in the market anyway so they're not left holding a real debt to their liquidity provider that needs to be satisfied..

But, everyone isn't trading an account of a few k with a retail broker. And a lot of us (I'll go out on a limb and say most of us) do use brokers that are indigenous to our own countries, provided we live in a country that has legitimate brokers.

In the case of futures like Billbss brought up: If you get into a severe negative balance situation, you can lose everything you own and be driven into bankruptcy--at least here in the U.S.
  • #9
  • Feb 10, 2009 11:42pm Feb 10, 2009 11:42pm
Important topic for possible threats and how to avoide such threat.

Anyone whose account gone negative and broker demanded him for money.

Pl share
  • #10
  • Feb 11, 2009 12:30am Feb 11, 2009 12:30am
Damn!

I thought you can never lose more than your account.
  • #11
  • Feb 11, 2009 12:47am Feb 11, 2009 12:47am
Sure it's possible.

I agree along the lines of Takisd though. If the balance does go below 0, the broker is gonna have a tough time getting the money out of the client (they would with me that's for sure ).
  • #12
  • Feb 11, 2009 1:22am Feb 11, 2009 1:22am
I talked to the president of ATC Brokers today, and he told me that individuals with a net worth of less than 300K are required to sign a promisary note that they take responsibility for such an extreme event resulting in "debit".
  • #13
  • Feb 11, 2009 2:16am Feb 11, 2009 2:16am
Quoting tdion
I talked to the president of ATC Brokers today, and he told me that individuals with a net worth of less than 300K are required to sign a promisary note that they take responsibility for such an extreme event resulting in "debit".
Interesting, better double check my broker terms!
  • #14
  • Feb 11, 2009 2:27am Feb 11, 2009 2:27am
Quote
I talked to the president of ATC Brokers today, and he told me that individuals with a net worth of less than 300K are required to sign a promisary note that they take responsibility for such an extreme event resulting in "debit".
Different brokers have vastly different approaches here. Small time forex brokers aren't going to chase you, and most have automatic margin calls anyway. Larger banks are going to expect that you pay it back, and will persue you if the amounts are large enough.

If you trade on an exchange you have to go thru a clearing house that will certainly chase you into bankruptcy, and they will force liquidate a position if they have to. It happens. But mostly because the trader just can't let go.

Most mid-level brokers (retail forex dealers, ECNs, etc) have reasonably good automatic margin calls and will liquidate your positions if needed. Yea you can end up with a net loss, but it'll usually be pretty limited if you've controlled your lot sizes. Some bucketshops guarantee that you won't lose more than your deposit.

Personally, since I trade 1% of my account per trade, w/ SLs of 50 to 100 pips, I'd need to see a 500 to a 1000 pip gap to wipe my account. As I don't hold vulnerable positions over a weekend... the risk of a sudden 500 pip gap in the middle of the day is tiny given my 1 or 2 lot positions. Can it happen? Sure, but I'm willing to accept that possibility or I wouldn't be doing it.

So yes, there is always a risk of this. If you can't stomach the risk of trading then don't trade. If you can't stomach the risk of leverage then don't use leverage. There's no such thing as a sure trade in this business, if you have a need to feel safe then go work a 9 to 5 and pray you don't get laid off.

Trading carries substantial risk of loss.
  • #15
  • Feb 11, 2009 3:27am Feb 11, 2009 3:27am
So what about brokers like FXCM who claim "never pay a debit balance" - is that just b.s?
  • #16
  • Feb 11, 2009 3:41am Feb 11, 2009 3:41am
Quoting DanUK
So what about brokers like FXCM who claim "never pay a debit balance" - is that just b.s?
If it's in the agreement that you signed, then it's legit. A lot of brokers guarantee that you'll never incur a negative balance. But not all of them.
  • #17
  • Feb 11, 2009 3:59am Feb 11, 2009 3:59am
Quoting billflet
If it's in the agreement that you signed, then it's legit. A lot of brokers guarantee that you'll never incur a negative balance. But not all of them.

That's what I don't get! FXCM clearly advertise "never pay a debit balance" but Clause 23.1 E states, in bold, "You will at all times be liable for the payment of any debit balance on your account and you will be liable for any deficiency remaining on your account in the event of the liquidation thereof in whole or in part by your or them".

Maybe I am misreading something but it seems like false advertisement to me! Let's sue
  • #18
  • Feb 11, 2009 4:56am Feb 11, 2009 4:56am
Hi,

I use Ecn's as well as retail brokerages (futures and cash). The scenario never occurred to me in 20 years.

I do think though that if stops are used and the price in an extreme event (as described by the original poster) passes by the stop, and the broker does not respect the applied stop it will simply end up in a legal dispute about how much responsibility lies with the broker to have measures in place to execute stops.

The broker would most likely try to rid himself of the responsibility by saying the market was out of control and the client would say: how can you (based on what you're saying) make me pay for what no-one could have anticipated - and by the way, I had a stop on in order to protect myself against this happening....your call!

regards
daytrading

P.S. (I personally go with what on poster here said: you should only lose what you have in terms of margin)
Enter Signature
  • #19
  • Feb 11, 2009 5:15am Feb 11, 2009 5:15am
Quoting daytrading
.... I do think though that if stops are used ...... and the broker does not respect the applied stop it will simply end up in a legal dispute about how much responsibility lies with the broker to have measures in place to execute stops.

regards
daytrading
Hey daytrading, how are you?? You make a good point.
If a broker does not execute your stop, and then says you owe a large debit..... They may need to prove that there were no market orders for the whole "1000pips". Isn't it unlikely that everyone could make all of their pending orders disappear all at once. There should be tons of orders being filled along the way.
If they just hold your trade until they decide to fill your stop a few ticks later, wouldn't it be a little tricky for them to try and sue you for it??
And if they widen their spread to 2000pips in an instant.... wouldn't it be a little tricky to try and sue you for it??
If it happened, they may have hundreds of clients to sue. Sounds tricky.
  • #20
  • Feb 11, 2009 5:42am Feb 11, 2009 5:42am
This is why you should trade through a LLC company account and not a personal account.
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