Brexit Lets Battered Brokers Lay Swiss Franc Ghosts to Rest

  • FXCM cites 60% boost to its retail pound trades after EU vote
  • Increase suggests measures to reduce losses are working

It took them a year and a half, but retail currency brokers are finally winning back some of the credibility they lost when a shock decision by the Swiss central bank cost them millions of dollars.

The opportunity to redeem themselves came in the form of an equally dramatic event in global markets: the volatility -- and profit potential -- spurred by Britain’s June 23 decision to quit the European Union.

FXCM Inc., which had to be bailed out when the Swiss National Bank abandoned its exchange-rate cap in January 2015, reported a 60 percent jump in average weekly pound-dollar trades by retail clients in the six weeks after Brexit. Saxo Bank A/S said July was its best month, including for non-professionals trading currencies, since the Swiss debacle -- vindicating the protective measures brokers took in the run-up the U.K. referendum.

“We’re having a much better year,” said Claus Nielsen, the Copenhagen-based head of markets at Saxo, which lost more than $100 million after the SNB announcement and was involved in lawsuits with at least a dozen customers.

“It’s not only due to clients emerging from Brexit profitability, but also, for example, the events in Turkey,” which suffered an attempted coup last month, he said. “Clients are using the opportunities in the market and being more active.”

Better Prepared

The SNB’s decision sent the franc surging more than 40 percent versus the euro in a matter of minutes, but the event was so unexpected that brokers struggled to parlay those price swings into profit.

When Brexit happened, they were better prepared: FXCM and Saxo, as well as competitors including OANDA Corp. and IG Markets Ltd., had all increased retail margin requirements on trades including the pound, euro, franc and yen. Raising the deposits demanded from customers to offset losses would, they hoped, avoid a repeat of the turmoil that followed the Swiss surprise.

For more on how currency traders prepared for the U.K. referendum, click here.

“Post-SNB, we had a lot to prove to our clients,” said Drew Niv, chief executive officer in New York at FXCM, which was subsequently rescued with a loan from the owner of Jefferies Group LLC. “The decision to raise margins ensured we operated normally throughout the Brexit market volatility without any disruption.”

Volatile Times

FXCM, which unlike most retail-currency specialists is listed, has seen its share price rise almost 30 percent from a 2016 low reached in the wake of the Brexit vote. It plunged 90 percent following the SNB announcement.

After the U.K. referendum, a JPMorgan Chase & Co. index of global price swings soared to 12.5 percent, compared with 11.7 percent a day after Switzerland scrapped its franc cap. While the gauge has since fallen back to 10.1 percent, it remains above its five-year average of 9.5 percent.

The increase in retail currency trading is a rare piece of good news in a foreign-exchange industry hit by the Swiss shock as well as a price-rigging scandal that’s led to more than $10 billion in fines and penalties.

While retail accounts for just 3.5 percent of global foreign-exchange dealing, according to the latest Bank for International Settlements report on the market in 2013, it may reflect broader trends. Central banks recently said activity in the world’s biggest currency trading centers recovered in the six months through April, following a drop-off since 2014.

Saxo, OANDA

At Saxo, trading volumes in various products, the largest of which was foreign exchange, reached $265 billion in July, a 46 percent increase compared with the same month last year. Retail currency trading rose 42 percent in the week ended July 16 compared with Brexit week, according to the Danish lender.

Currency broker OANDA said retail-trading volumes rose 340 percent on the day the U.K. result was announced, without specifying the period that’s compared with. It cited negative government-bond yields across the developed world, driven by years of easy money policies, as another reason currency dealing is becoming more popular among non-professionals.

“When you get such large moves in any asset class, it’s a given that there’ll be an uptick in interest,” said Dean Popplewell, a Toronto-based currency analyst at the company. “There’s been a lot of movement -- not only because you get much more volatility, but also because people are looking for returns.”

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