How will FX brokers avoid Brexit black swan volatility? – Part 4, ADS Securities, London

Just over two weeks is all that remains before the citizens of the United Kingdom cast their votes as to whether the nation in which they reside should remain a member state of the European Union, or whether it should go it alone as an independent sovereign nation.

No referendum was held when Britain agreed to an accession treaty on 22 January 1972 together with the EEC (European Economic Community) states, Denmark, and Ireland, or when the European Communities Act 1972 went through the legislative process. Britain joined the European Economic Community on 1 January 1973, along with Denmark and Ireland.

Throughout the 1980s and 1990s, discussions had been held on allowing a referendum to take place, however here we are 44 years after Britain joined what was then the EEC, with votes about to be cast.

Today’s economic and commercial landscape is considerably different to that of 44 years ago. Britain is a financial powerhouse, home to the largest interbank FX trading center in the world by a considerable margin – just 6 banks, all located in Canary Wharf in East London, account for over 46% of all global interbank FX order flow, and the City of London is an ultra-modern, highly technologically advanced financial powerhouse, hosting the majority of the institutional FX companies and prime of prime brokerages which power the non-bank electronic trading industry for the entire world.

Britain’s pound is the most highly valued currency in the world by a considerable margin, and has been for many years.

 

Such an important mainstay of the European economy, Britain is a shining light of ingenuity and financial prowess, therefore, the potential outcome of the referendum on what has been dubbed ‘Brexit’ from the European Union is a matter for all brokerages and traders to concentrate on.

Indeed, a potential exit from the European Union could be the cause of high volatility in the FX market, as such an important country goes it alone, just as remaining in the European Union may lead to volatility as the European sovereign debt would still present a burden to the British Chancellor of the Exchequer’s balance sheet.

In 2015, the Swiss National Bank removed the 1.20 peg on the EURCHF pair, sending the currency markets into a sudden period of unprecedented volatilty, exposing brokerages to negative client balances and in some cases causing their insolvency.

The British pound has never been pegged to the Euro, however a similarly volatile situation could occur in the days following the result of the referendum.

ADS Securities points out three important factors to consider when trading pre and post referendum

Whether traders have decided on their strategy or will be sitting out the Brexit vote, one thing is certain there is great potential for market volatility. We have been advising clients to make sure they have access to the appropriate risk management tools. Before trading Brexit they need to check three main things:

1 Is your broker well regulated and does it have the capital to handle a large market move. There is no point you trading the right strategy if your broker does not have the reserves to cover your trades.

2 Make sure you have all the necessary stop/ losses in place and that you are on hand to react to the market. Using a virtual private server is always a sensible option so that you know you will be in control of your positions

3 Don’t over leverage. Margins may change and you do not want to be faced with a margin call if the markets start moving very quickly

Finally, set your strategy and stick to it. Many very experienced traders will sit out Brexit and return to the market when they know and can read the trading patterns.

ADS Securities has distinct experience in this matter, as the company operates a Prime Brokerage from London and therefore understands counterparty credit risk as well as the requirements of brokerages and traders. Indeed, caution is paramount and ADS Securities point about many traders simply keeping positions closed during the referendum period is certainly something that we concur with.