Swiss Knife Forex Traders in the Back

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No one saw it coming. There was not even a hint in advance that the Swiss National Bank (SNB) was about to stab the financial world in the back. As we reported yesterday, the euro and the U.S. dollar took immediate hits. But we also expected broader and longer term fallout would follow. In the past 24 hours, devastating aftershocks are being felt around the world, especially among  exchange brokers.

FXCM (NYSE:FXCM) is the largest retail foreign exchange broker in the U.S. and Asia. It has just come off the last quarter with a record $1.4 trillion in trades. However, the SNB’s surprise announcement that it was immediately unpegging the Swiss franc generated $225 million in negative equity for FXCM clients. The company released a warning that,

As a result of these debit balances, the company may be in breach of some regulatory capital requirements.

FXCM’s share price fell more than 85% this morning in pre-market trading. FXCM shares closed at $12.63 yesterday. At this moment (9:52 a.m. EST) its shares are trading at $1.77.

What it means

  1. FXCM’s clients now owe the company $225 million
  2. Unless and until the company can raise that capital, it cannot legally conduct business.
  3. Trading of its stock has been halted.
  4. FXCM is scrambling, or as they put it, “actively discussing alternatives to return our capital to levels prior to today’s events and discussing the matter with our regulators.”
  5. FXCM is fighting for it’s life.
  6. An announcement of some kind is expected from FXCM sometime this morning EST.
  7. The problem is not on FXCM’s.

Others are devastated

A representative of the National Australia Bank said, “I would be astonished if we did not see more casualties.” He was spot on.

  • Gain Capital Holdings (NYSE:GCAP) share price plummeted 25% in early trading today.
  • Interactive Brokers Group (NASDAQ:IBKR) shares dropped 9%. Customers now owe them a combined $120 million.
  • Global Brokers NZ closed permanently.
  • British broker, Alpari UK, declared insolvency and closed its doors.
  • London Capital Group (NYSE:LCG) is dealing with a deficit of approximately £1.7 million.

It Ain’t Over Until It’s Over

And it’s not over. It’s not unreasonable to expect FXCM to be unable to raise the cash it needs. Nor is it unreasonable to expect other forex traders not to become insolvent. Right now the damage isn’t pretty. There is a reasonable chance that the fallout may continue to grow and become more widespread.

 

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