losing positions in the Sydney window.

injay

Recruit
Messages
1
Recently I entered into a trade with my primary broker. My broker is a subsidiary of a larger capital group. While I have subsequently closed my account, I have a lingering question concerning Forex and brokers that no one has been able to answer and it seems like a legal Achilles Heel to this entire enterprise.

Position: Forex pair NZD / CHF [New Zealand Dollar vs Swiss Franc]
The direction was short with leverage provided by the broker.

Entry time was morning Eastern Time (New York) and I set a stop loss. I am not new to trading - everything was fine in the early stages. My position was quite small (around 15,000 units) as I was assessing the broker to see how the trade went and was handled.

It was understood a spread charge would be imposed and the entry Bid-Ask spread charge was 2.8 Pips exactly as advertised.

It is also understood that at 22:00 GMT the volatility of the market increases and a finance charge would also be applied to open positions remaining open at that time.

Nonetheless, I now have encountered a situation that seems to defy explanation.

At 22:20:45 the NZD/CHF pair experienced an upward spike in the size of the spread to 22.6 Pips and closed my position. I was charged a “significant” spread fee which accounted for nearly half the loss in value of the position. The position being small wasn’t a factor . . .the spread would have been nearly 50% of the loss regardless of the size of the position.

My concern is not about the size of the monetary loss, I have certainly lost and gained far greater amounts in trades. I am concerned by the sudden 22.6 pip directional spike in the spread that seemed to exist for moments only and destroyed my position. The spread is set by the broker and while subject to volatility, a sevenfold (7.9 to be exact) increase seems disproportionate to the point of seeming hostile to a retail trader attempting to do business. The increase was also non-systemic insomuch as it lasted mere moments and was not part of a larger spread expansion movement. In mathematical terms, this was not the behavior of a function over time but in fact a jump discontinuity. This is further evidenced by the fact my stop loss was exceeded by 4.8 pips to close the position with a greater than projected loss. The spread “jumped” to 22.6 pips and then almost instantly jumped back.

While I realize these are smallish transaction numbers, it is the first time what I am seeing truly makes no sense and has the smell of the broker behaving in a way that is at a minimum disingenuous as the brokerage directly benefits from this event. I am currently trading smallish accounts with three brokers to assess where to do future business and this is not a good result from my perspective for this broker. But perhaps I am being unfair - is this phenomenon one lousy broker or is it systemic for Forex trading on spread-based accounts? I am actually grateful to have used small numbers because this complaint is not about me losing money. While I am not happy to lose the trade, I would consider this a valuable exchange if it allows me to learn the ins and outs of hyperbolic spread jumps in during the Sydney trading window.

While I didn’t expect much from the call, I did call customer service at (or about) 6:30 pm local time (roughly one hour after the stop-out) and a pleasant representative named “Jose” answered the phone. According to Jose, there is no regulation or limit to how the spreads might behave either expanding or contracting during the “five o’clock” hour when only the Sydney markets are open and volatility goes high. While I already understood the “five o’clock” hour phenomenon, a spread increase of nearly 800% for a time interval measured in seconds seems too much and is fundamentally a deal-breaker for me. Other sample brokers (I was in two others at the same time) do not show any parallel activity that corresponds to a similar spread surge near the same time frame. Jose replied that the spread is extended to the brokerage firm by the over-arching financial agency. In this case, I assume that must be the larger capital group underwriting the Forex firm. Jose went on to imply the spread is even worse when trading exotics, and I asked if NZD/CHF was considered an exotic pair by the brokerage, he said no it was not considered an exotic pair. After a few moments of awkward silence, I asked what his point was? He reiterated the argument that the spread has no boundaries at that hour. It was obvious at this point we had entered a logic circle and the phone call soon ended. We were both rational, civil, and pleasant - I thanked Jose for his time. This scenario is not Jose’s fault and I sincerely appreciated his earnest attempt at explanation even though I remained frustrated and uninformed.

My fundamental question remains. How can a legitimate broker simply increase the spread by a multiple of 7.9 without explanation or even perhaps itself fully understanding why? This seems especially hostile as the entire risk element is on the retail trader and to the complete benefit of the broker. Simply saying the spread number comes from above, while likely true, is insufficient especially when it is not a universal effect among parallel brokerage firms.

I do fully understand that a spread fee might be assessed and am willing to enter such a fee as advertised into my calculations as the so-called “price of doing business”. If anything I am generally deeply appreciative of the ease and speed that brokers have provided to retail traders. However, the lack of reasonable explanation, or seemingly even understanding, of spread surges during this particular hour represents a hostility to retail traders attempting to make carefully measured projections on the future risk that is beyond the pale of expectations of that risk. Price motion is the risk we are sharing, mercurial and inexplicable spread expansions not only make this venture too risky, it clearly leaves wide open the possibility of apparently untraceable abuse and fraud. I’m not convinced (yet) that this broker is engaged in abuse or fraud, but the complete lack of anything resembling a reasonable explanation certainly fails to mitigate such a concern.

The Bid-Ask spread number comes from some algorithm. I do not assume there is a “man behind a green curtain” moving spread values to capture positions that have drifted too near the price line. It just feels that way. However, the lack of transparency that benefits the brokerage (a 50% spread charge on a rather small position) seems “off” to say the least. What is the algorithm that generates a spread of this respective magnitude and further generates such a magnitude for mere moments? I do not accept that hyper risk exists for the brokerage as a calculation for mere seconds before ameliorating that perceived risk by closing and claiming spreads from my position (among others I can only assume). If the algorithm operates to simply “harvest” the open positions in order of closest-to-price first until the appetite of the brokerage is satiated, that is a behavior that we (the money providers being harvested) should collectively understand. It is also unimaginable that such a “harvesting” is actually legal much less ethical.

I can already hear some unsolicited advice: never carry a position overnight, never use stop-losses, or move your stop-loss some increased distance during the hour of high volatility. To all these and similar ideas, I feel a resounding “no” is in order. Not that the advice won’t work or is somehow even bad advice. I submit a parallel metaphorical storyline: every day for one hour we are expected to run and hide while the out-of-control spread-monster attacks and eats its fill of our slower-moving (often less resourceful) contemporaries. That cannot be a long-term strategy required for survival in this enterprise. The labeling of this brokerage practice as “unfair” simply doesn’t do it justice. Despite spread-monster reading as childish and silly - the parallel holds almost perfectly. I also long ago stopped hiding from monsters.

At this point, I have formally requested an explanation of how the 16/5/2022 22:20:45 spread increase occurred and the circumstances under which it was imposed. The amount of the spread charge has been well communicated, I have thanked the brokerage for that communication.

From the United States Code of Federal Regulations: Title 12; Chapter I: Part 48.6 Disclosure: paragraph f.
(f) Disclosure of fees and other charges. Immediately following the language required by paragraph (e) of this section, the statement required by paragraph (a) of this section must include:

(1) The amount of any fee, charge, spread, or commission that the national bank may impose on the retail forex customer in connection with a retail forex account or retail forex transaction;

(2) An explanation of how the national bank will determine the amount of such fees, charges, spreads, or commissions; and

(3) The circumstances under which the national bank may impose such fees, charges, spreads, or commissions.

I realize this will only apply inside the US and may possibly be no small part of the reason many international brokerages refuse US clients. Nonetheless, I am currently, albeit not optimistically, awaiting an answer. In the interim, I am interested to know the thoughts and similar experiences of others on this forum. Any wisdom here is welcome and thank you.

I am not interested in "help" recovering my trade loss.
 

AsstModerator

FPA Forums and Reviews Admin
Messages
5,702
It sounds like the sudden spread widening is related to the daily rollover, which is when swaps are charged. Spreads generally do widen significantly at that point, but 7 fold would be enough to make me find a new broker.
 

JimmyRozza

Master Sergeant
Messages
260
It sounds like the sudden spread widening is related to the daily rollover, which is when swaps are charged. Spreads generally do widen significantly at that point, but 7 fold would be enough to make me find a new broker.
Agreed, 7 fold is pretty insane!

NZD / CHF is not a pair I trade, but imagine it would have very low liquidity which could be a contributing factor.
 
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