E Is Your Broker Ready For Another Forex Flash Crash?

Over the years, global forex markets have experienced several flash crashes. However, these crashes have become more frequent over the last few years, with at least three experienced since 2015. The most notable ones came following major events for the respective countries.

The EUR/CHF was the first major flash crash over the last two years. This came following the decision by the SNB (Swiss National Bank) to unpeg the Swiss Franc’s 1.2000 exchange rate limit against the Euro.

In January, last year, the Russian Rubble plunged to new multi-year lows against its forex counterparts prompting the Russian government to undertake measures to stabilize the currency while in June, the British Pound fell to the lowest level since 1985 following the Brexit vote.

In each of these occasions, several traders and brokers were caught unaware thereby losing millions worth of risk capital. Therefore, traders are now becoming more cautious in selecting their preferred brokers.

Some brokers have taken various measures to protect themselves and their clients against the effects of a potential forex flash crash, but others are still toying with the situation. One of the ways of identifying a broker that has taken the necessary measures is by checking whether the broker has an A-Book model, which allows them to transfer clients’ orders to the interbank market. This protects the broker against sharp volatility spikes, which reduces the chances of bankruptcy or insolvency. More information on factors to consider when choosing your broker can be found here.

Systemic events, market volatility, and slippage

Systemic risk in the forex market is on the rise as geopolitical and fiscal policies continue to dictate the direction of exchange rates. There are those who believe that fundamentals are having a lesser role to play in the volatility of the foreign exchange markets. This is one of the reasons why many brokers are being caught off-guard by slippage triggered by systemic events.

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Disclosure: The material appearing on this article is based on data and information from sources I believe to be accurate and reliable. However, the material is not guaranteed as to accuracy nor does it purport to be complete. Opinions and projections, both my own and those of others, reflect views as of dates indicated and are subject to change without notice. The contributions and opinions of others do not necessarily reflect the views of Nicholas Kitonyi. Nothing appearing on this article should be considered a recommendation to buy or to sell any security or related financial instrument. Investors should discuss any investment with their personal investment counsel. Past performance does not guarantee future results.

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