Following the SNBomb and the subsequent leap of the Swiss franc, the lack of liquidity not only liquidated some traders’ accounts, but also put them into negative equity territory. This means that in theory, they need to pay more money to the broker only to cover the debt, before being able to trade again.
Quite a few brokers went ahead and decided to forgive negative balances, and this is clearly a positive move.
Traders that lost all the money but understand that this was an extraordinary event will likely return to the familiar broker that already showed generosity. The motivation to return to the broker that went after you for a negative balance is quite low, to say the least.
And for both veteran and new traders, brokers could take another step: they could declare that the trader cannot lose more than he deposited. This will make the potential client feel more safe and more likely to open an account with that broker.
What can the broker do to defend against these so called “black swan” events?
First of all, both brokers and traders should understand that black swans are not that rare anymore. Extreme events happen more often than thought. And when there are long periods of low volatility, like some very long months in 2014, they are usually followed by an explosion of volatility.
Now, forex websites, including this one, many others and also brokers’ websites, preach about money management. Proper money management enabled some brokers to come on top and others to lose a lot of money.
In simpler words: some brokers limited leverage on Swiss franc pairs many months before the SNB removed the peg. Did they get a tip from Thomas Jordan? I don’t think so. They just saw their clients pile up on CHF shorts using high leverage and did not like what they saw.
A similar situation could happen, albeit on a smaller scale with the Danish Krone. Is your broker limiting leverage on DKK pairs?
In general, leverage is part of forex trading, and as the cliche goes, it can be a double edged sword, for both traders and brokers.
High leverage + volatility = potential for extreme situations.
The solution to extreme situations is not to chase the traders for debt, but rather prevent these kind of situations. Like with health: the best and cheapest treatment is prevention: quitting smoking is better than a complicated lung operation.
The same goes for forex: controlling leverage for sensitive currencies could prevent reaching negative balances.
And circling back to the headline: forex traders should not lose more than they deposit. What’s in it for the broker? A potential client would prefer to open an account where he knows he cannot lose more than he deposited .