The Swiss National Bank’s decision to remove its exchange rate floor on the EUR/CHF (euro/Swiss franc) came absolutely out of the blue. There wasn’t even any market gossip about it. Though it was nearly impossible to predict such a seismic event, brokerage firms that took the necessary precautions were able to avoid major damage by setting up limits to ensure a cap on customers’ equity exposure.
Even precautions on the traders’ side—like placing stop orders at critical price levels—would not and, in fact, could not have worked in a critical situation like the one following the Swiss National Bank’s announcement of cancelling artificial devaluation of the Swiss franc. This is due to the fact that no price quotations were available at levels where most stop orders would have been placed.
The only parties capable of mitigating the consequences to protect client interests were brokerage firms. When risk management is done right on the retail brokerage level, the arrangement between a liquidity provider and a brokerage company assures that all potential risk arising from client orders is limited to the collateral placed at the liquidity provider partner which, in most cases, is only a certain portion of the client’s deposit. Conservative risk management—in other words, providing a fair and stable trading infrastructure—also garners trust, enhances customer relations, and helps brokerages retain clients. Qualities like these are vital in financial emergencies.
This infographic illustrates a timeline of the Eurozone Debt Crisis, and how the crash of the Swiss franc could have been avoided.
Infographic by: 3tgbrokers
Even precautions on the traders’ side—like placing stop orders at critical price levels—would not and, in fact, could not have worked in a critical situation like the one following the Swiss National Bank’s announcement of cancelling artificial devaluation of the Swiss franc. This is due to the fact that no price quotations were available at levels where most stop orders would have been placed.
This infographic illustrates a timeline of the Eurozone Debt Crisis, and how the crash of the Swiss franc could have been avoided.
Infographic by: 3tgbrokers
