The fateful Forex Black Thursday

The 15th of January 2015 will be remembered as one of the most historic days in the history of financial markets, the Forex´s Black Thursday.

That day, tens of thousands of traders around the World found themselves in a dramatic situation within minutes. The number of accounts with negative balance – in some cases extremely negative – is staggering.

Swiss Bank Forex failed intervention

All this started years ago when the Swiss Central Bank decided to intervene the currency markets to “stabilize” and calm things down in the European markets.

They pegged the franc to the euro at 1.20 euro per franc. Curiously, that day of 2011 gold made its historical high.

From that moment on it was obvious that trading the Swiss franc against the dollar would be the same as trading the euro dollar. That day I stopped trading the Swiss franc.

Why would I trade the franc when I can trade the euro with better conditions?

Carry trading EURCHF

Despite it, many traders continued trading the franc. In the case of the EURCHF an opportunity to make “easy” money arose.

That day people started to borrowing money in francs and investing in euro. In other words, a lot of people went long the EURCHF with the intention of getting the positive carry trade.

Interest rates were higher in Europe than in Switzerland, and therefore if the Swiss Government had a compromise to defend the 1.20 quote, it meant that being long that pair people could collect an “easy” rent.

What nobody expected was that the Swiss Central Bank would revoke the “parity” all of a sudden. In some way, people expected some tips before that happened.

In 1992, in a similar case, with the Black Wednesday of the pound, the English had to abandon their peg to the mark. In that case, however, the market was giving some tips the days before that happened.

A lot of people had the chance to get out. George Soros and other speculators took advantage, but others lost.

At that time there was not forex retail and the impact was felt at the institutional level.

In addition to this occasion, there was a disorderly fall in the pound in the intra-day, but nothing compared to the collapse of the franc rates on that fateful Thursday.


The fall of the pound was less severe, but more famous since the pound is one of the key currencies of the world monetary system.

The franc case did not affect everybody since it was not traded in a massive way (imagine if the black swan involved the euro).

The unexpected Black Swan of the Swiss Franc

As I said, nobody expected this black swan this way, coming from nowhere, in a market conditions which were not too bad. When the Swiss Bank dropped the bomb, the market disappeared in a matter of seconds.

Nobody was selling francs, there was no market for it at all. orex brokers found themselves in a dramatic situation. Many of them, with ECN models, stopped receiving quotes, and only could liquidate their customer positions with terrible prices after the market had dropped 20, 30 or 40%, what means 2000 or 4000 pips depending on the broker.

That numbers, in the forex industry where everybody is leveraged more than 10 to 1 in most cases, is a total catastrophe.

Suddenly, people with $5.000 accounts found out that they were in the red by 50.000 or more. A desperate situation for a lot of people, who were playing safe using stop loss orders.

Market Makers Black Thursday

Curiously, the brokers that behaved better, were pure market makers. But, why was it so?

The fact is that market makers have fewer problems to face these kinds of situations, at least if the majority of traders are in the wrong side of the bet.

On this occasion, 90% of traders were short the franc trying to get an easy “rent”.

The majority of market makers do not have to send those trades to the real market, so when the trade unfolds they just liquidate their customer balances.

Some market makers even forgave negative balances, like Oanda and other, but some market makers decided they will try to collect the debts by legal procedures.

ECN brokers had a lot more problems because they send their client orders to their providers so they become liable for their losses.

Losses that in most cases cannot be recovered, which leaves the ECN broker in a very bad position.

In that way, Excel Markets went bust immediately, and FXCM and Alpari Uk were at the brink of collapse. Alpari is now searching for a buyer and FXCM is getting some desperate financial help.

Other ECNs with less exposition to the currency, or better risk policies just avoided the debacle.

The problem with market makers, and what could be their black swan, is the case in which traders are in the right side of the trade. In a case like that, there would be countless traders with their balances multiplied by 5, 10 or 20 and claiming for their money to the market maker (which did not send any order to the market). Market makers would go bust in that case.

Without a doubt that day will mark a before and an after in the forex market.

Intervention in the Forex Market

A move of such magnitude in just a few seconds in one of the main forex pairs in the World (which are considered as “secure” to trade) leaves many questions for the sector.

That kind of move could be typical of single stocks when there are important announcements, but when that happens in one of the best pairs of the most “liquid” market in the World we have to think deeply about it. And, in those cases, stop loss orders are useless.

If there is no bid-ask, there is no price to liquidate the trade.

The lesson is that we should not trade assets that are intervened directly by the governments since they can revoke it any time. I think that we should trade in assets that are the less intervened possible.

Even though we know that the financial world is completely intervened today, it is true that there are assets more intervened than others.


Thanks for reading and sharing.