Even though traders say they like volatility, their attitude is straight out of Goldilocks: not only is too little too bad, but so is too much. The recent oil price plunge has sent rattles across financial markets around the world, with more knock-on effects expect as shale gas players start to show signs of stress.
And today’s big event was so unforeseen as to verge on being in black swan terrain. The Swiss National Bank, which had a program in place to keep the euro from falling below 1.20 to the Swiss franc.
The Swiss National Bank abruptly terminated the cap today. The stated reason was, in effect that the euro had weakened so much that even though the Swiss franc might wind up being more overvalued against it, it was not as overvalued versus other currencies (read the dollar). Analysts believe a second reason was the widely-expected launch of QE in the eurozone, which will weaken the euro further and would required considerably more intervention by the Swiss National Bank to maintain the cap.
The currency move was brutal. The euro fell 30% against the franc.* Customers in trading accounts of the trade had their account equity wiped out, according to Bloomberg, in turn leaving the brokerage firms short.
The Wall Street Journal describes the carnage:
A major U.S. currency broker said it suffered “significant losses” that wiped out its equity and a New Zealand foreign-exchange trading house failed as the fallout from the decision by the Swiss National Bank to cease capping the nation’s currency spread across the world.
FXCM Inc., the biggest retail foreign-exchange broker in Asia and the U.S., said in a statement that due to unprecedented volatility in the euro against the Swiss franc, its losses left it with a negative equity balance of around $225 million and that it was trying to shore up its capital.
“As a result of these debit balances, the company may be in breach of some regulatory capital requirements. We are actively discussing alternatives to return our capital to levels prior to today’s events and discussing the matter with our regulators,” the company, which has a market capitalization of around $701.3 million, said in a statement. Shares of the company fell 15% in U.S. trading and tumbled another 12% after hours…
Earlier, small New Zealand currency trading house Global Brokers NZ Ltd. said it would close its doors as it could no longer meet regulatory minimum-capitalization requirements of 1 million New Zealand dollars (US$782,500).
The company said the SNB’s decision resulted in rare volatility and illiquidity in the currency market. “Both our primary and backup liquidity providers became unresponsive or illiquid for hours after the event,” said the company, whose shareholders are listed as being based in the British Virgin Islands.
More detail from Bloomberg:
“I would be astonished if we did not see more casualties,” Nick Parsons, the London-based head of research for the U.K. and Europe at National Australia Bank Ltd., said by phone from Sydney. “This was a 180-degree about turn by the SNB. People feel hurt and betrayed.”
Dealers in London at banks including Deutsche Bank AG, UBS Group AG and Goldman Sachs Group Inc. battled to process orders yesterday when the SNB shocked markets with its announcement on Thursday morning in Zurich. The franc surged as much as 41 percent versus the euro, the biggest gain on record, and climbed more than 15 percent against all of the more than 150 currencies tracked by Bloomberg.
Notice the expectation by traders that central banks will watch their backs? In its statement FXCM said most of its customers were on the wrong side of the trade.
* The move was so disorderly that Bloomberg and the Wall Street Journal differ substantially as to its maximum amplitude, with the Journal putting it as 30% versus the euro and Bloomberg at 41%