It's my pleasure, FE
Since 2007, FXCM has provided traders with No Dealing Desk (NDD) forex execution. On the NDD model, we offset each client order one-for-one with the best prices from competiting liquidity providers. That means we don't profit from client losses or lose from client profits. Instead, we make money from client trading volume.
At the time of the SNB event on January 15th and the video about what happened, FXCM only offered NDD forex execution. However, since then, we have introduced a new dealing desk option. It is designed for traders who demand higher leverage than we offer on NDD.
In light of the reckless actions of the SNB, FXCM has since ceased offering any currencies which carry significant risk due to potential manipulation by their respective governments either by a floor, ceiling, peg, or band. In addition to that, we also raised the margin requirements for other currency pairs which reduced the maximum leverage available on our NDD forex execution to 100:1.
We continue to receive demand for higher leverage (lower margin requirements) particularly from traders in emerging markets where the average account balance is smaller. Offering these traders a DD option as an alternative to our existing NDD model allows us to cater to their demand for higher leverage from a risk management perspective.
It's important to understand that the market data show that the losses on January 15 were not the result of FXCM technology or FXCM margin requirements, but rather due to the extreme market dysfunction resulting from the SNB's irresponsible and unforeseen announcement to completely remove the 1.2000 EUR/CHF floor.
The January 15 flash crash saw the EUR/CHF drop 40% in seconds whereas the 2010 flash crash in the equities market saw about 9% drop in the Dow Jones Industrial Average over the course of a few minutes. With a 40% drop in EUR/CHF, a forex account could go to negative equity even for someone trading on as little as 3:1 leverage with over 33% margin to cover open trades.
The EUR/CHF move was 44 standard deviations, while most risk management systems only contemplate 3-6 standard deviations. The moved wiped out those clients' account equity as well as generated negative equity balances owed to FXCM of over $225 million. We believe that the FXCM system operated properly during this event.
The caveat of our no dealing-desk execution system is that traders are offset one for one with a liquidity provider. When a client entered a EUR/CHF trade with FXCM, FXCM Inc. had an identical trade with our liquidity providers. During the historic move, liquidity became extremely scarce and shallow, which affected execution prices. This liquidity issue resulted in some clients having a negative balance.
While clients could not cover their margin call with us we still had to cover the same margin call with our banks. When a client profits in the trade FXCM gives the profits to the customer, however, when the client is not profitable on that trade FXCM Inc. ends up having to pay the liquidity provider.
FXCM ended with a regulatory capital shortfall. Accordingly, FXCM needed to get a loan to cover this balance, which it did. For anyone that still thinks FXCM is running an FX dealing desk for clients on our No Dealing Desk (NDD) forex execution, we have now demonstrated that such is not the case.