4 ms·
The issue is leverage. [1] [2] In order to trade $1mm worth of EUR vs CHF, you didn't actually have to have $1mm. So, if the CHF, for whatever reason, increas
by ghshephard 12y ago
The issue is leverage. [1] [2] In order to trade $1mm worth of EUR vs CHF, you didn't actually have to have $1mm. So, if the CHF, for whatever reason, increased above the SNB peg of 1.2, you could then trade $1mm for, say, $10,000 in your account (100:1 leverage). Then, if there is a 1% move back to the Peg, you profit 0.01 x $1mm, or $1,000.
The reason brokers will give you this much leverage is that ForEx (up until a couple days ago) was one of the most liquid markets on the planet. If you hit a margin call, your broker could instantly liquidate your entire portfolio to cover any loss, with very little risk.
And then, the SNB walked away from their Peg, and the earth collapsed underneath all these traders (and brokers in some case) - All these traders/brokers who thought that a position could be liquidated at minimal loss, ran into a market with a scarcity (absence) of buyers, and were wiped for the entire value of their accounts (and more - lots of traders ended up with a negative position)
This is a wakeup call that people will remember or a very, very long time (and should have been learnt in the 2008 Mortgage collapse) - the potential for a black swan event is everywhere.
[1] http://www.investopedia.com/ask/answers/06/forexleverage.asp http://www.investopedia.com/ask/answers/06/forexleverage.asp
[2] http://www.investopedia.com/articles/forex/08/margin-leverage-forex.asp http://www.investopedia.com/articles/forex/08/margin-leverag...
- the8472 12y ago> $1mm Millimeter dollars? Milli-milli dollars? I could guess what you mean, but it would be nicer if you used SI prefixes.
- jobposter1234 12y agomm, for whatever reason, is very commonly used to donate millions of dollars.
- jayess 12y agoSimilar to the plural "pages" often being written as pp.
- toufka 12y agoA Romance language thing. In Spanish it's more obvious as it's more commonly used. If you have a plural noun the acronym has double letters. The United States is rendered as EEUU (Estados Unidos, pluraled) or The Olympic Games as JJ OO (Juegos Olimpicos, pluraled).
- tcbawo 12y agoI always presumed "mm" was an abbreviation for "mille mille", which is Italian for a thousand thousand.
- NDizzle 12y agomm, Roman numeral. 1000*1000.
- the8472 12y agoroman numerals are rendered in capital letters as far as I know, so it's incorrect usage either way. Not to mention that the roman system is not multiplicative but additive.
- branchless 12y agoIt's used to obfuscate FX. Once you work that out they'll start using yards for billion, then after this Cockney rhyming slang.
- deleted 12y ago[deleted]
- throwawaymsft 12y agoMaybe because finance was around for a few millennia before SI?
- jayess 12y agoA 1% move would net you $10k, not $1k. That's why it's so alluring. You can gain (or lose) a lot when you're leveraged at 100:1 (as most retail FX brokers allow) and the currencies move just a small amount.
- branchless 12y agoFX for the common man is recent. It's the new housing: access to leverage.
- waps 12y agoThis makes me wonder. Aren't those retail investors all indebted to FXCM now ? They mostly made the bets using the platforms, (I assume) very little bets were made by FXCM itself.
- cheatdeath 12y agoCorrect. "FXCM Inc. (FXCM), which handled a record $1.4 trillion of trades by individuals last quarter, said clients owe $225 million on their accounts after the Swiss National Bank’s decision to abandon the franc’s cap against the euro roiled markets worldwide." http://www.bloomberg.com/news/2015-01-16/fxcm-faces-losses-on-franc-trades-as-swiss-shock-spreads.html http://www.bloomberg.com/news/2015-01-16/fxcm-faces-losses-o...
- pjc50 12y agoOr if you have a FX-denominated mortgage (common in Hungary), you can have both!
- gwern 12y agoI don't think this is a 'black swan' event. The strategy was pretty explicitly premised on a binary event: the Swiss bank keeping the peg or not. It didn't. As OP indicates, the possibility of the peg breaking was understood by anyone who actually understood the trades they were making. And it's not like central banks have never failed to keep a peg in the past...