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  •  » SNB's drop of EUR/CHF price floor has changed trading industry

#1 16-01-2015 15:42:58

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SNB's drop of EUR/CHF price floor has changed trading industry

SNB's drop of EUR/CHF price floor has changed trading industry

As the Swiss Franc true market value is being unleashed after the 1.20 euro peg dropped, spreads are whipsawing from liquidity providers anywhere from 50-100 pips in volatile trade.

Yesterday, the Swiss National Bank did away with the EUR/CHF floor which had been in place since September 2011 and ensured that one euro could not buy less than 1.20 swiss francs. This has created volatile trade with the swissy appreciating by double digits across the board in the immediate aftermath.

This market moving event could give Forex brokers the volatility needed to surpass many of the well performing months of the past quarter, we shall find that out in time… The market reaction was swift and from the 1.20 peg the EUR/CHF briefly touched as low as 0.7275, close to a 5,000 pip drop and as low as 28%! The currency pair has since stabilized around the 1.02-1.06 mark at the time of writing, down around 15% on the day still, check out the before and after charts below, courtesy of cTrader.

The huge foreign exchange rate movements in the wake of the announcement SNB has undoubtedly been largely amplified by algorithmic trading. Financial markets are now more dependent on decisions processed by computers and algorithms. When a central bank decides to change its policy, for example by reducing the interest rate, thousands of computers react in a split second, creating a wave of sales or purchases.

When banks reject trades, brokers are either unable to cover positions or execute transactions at prices that do not exist on the market, making them vulnerable to arbitrage.

The decision of the SNB will not be forgotten anytime soon. Risk policies and leverage use opportunities, especially among prime brokers, will certainly change soon. The biggest risk at the moment is the ability to hold negative balances, particularly among STP brokers. This day is likely to change the risk management methods of forex brokers and prime brokers in what is a highly fragmented market.

Brokers market makers who actually posted market prices have exposed many brokers enormous risks and any losses caused by today's event are still on the surface.

Algorithmic trading has been particularly affected today, many companies have lost tens of millions of dollars in forex.

If the prime brokers and market participants do not take action on their own, the regulators will force them to. The impact of the costs on the market will be much more important. Industry should be prepared to implement better controls for its own good, because it seems that tumultuous time for the foreign exchange market are far from over.

"Anything worth having is worth going for - all the way." - J.R. Ewing


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