The issue is leverage. [1] [2] In order to trade $1mm worth of EUR vs CHF, you didn't actually have to have $1mm. So, if the CHF, for whatever reason, increased above the SNB peg of 1.2, you could then trade $1mm for, say, $10,000 in your account (100:1 leverage). Then, if there is a 1% move back to the Peg, you profit 0.01 x $1mm, or $1,000.
The reason brokers will give you this much leverage is that ForEx (up until a couple days ago) was one of the most liquid markets on the planet. If you hit a margin call, your broker could instantly liquidate your entire portfolio to cover any loss, with very little risk.
And then, the SNB walked away from their Peg, and the earth collapsed underneath all these traders (and brokers in some case) - All these traders/brokers who thought that a position could be liquidated at minimal loss, ran into a market with a scarcity (absence) of buyers, and were wiped for the entire value of their accounts (and more - lots of traders ended up with a negative position)
This is a wakeup call that people will remember or a very, very long time (and should have been learnt in the 2008 Mortgage collapse) - the potential for a black swan event is everywhere.
A 1% move would net you $10k, not $1k. That's why it's so alluring. You can gain (or lose) a lot when you're leveraged at 100:1 (as most retail FX brokers allow) and the currencies move just a small amount.
This makes me wonder. Aren't those retail investors all indebted to FXCM now ? They mostly made the bets using the platforms, (I assume) very little bets were made by FXCM itself.
Correct. "FXCM Inc. (FXCM), which handled a record $1.4 trillion of trades by individuals last quarter, said clients owe $225 million on their accounts after the Swiss National Bank’s decision to abandon the franc’s cap against the euro roiled markets worldwide." http://www.bloomberg.com/news/2015-01-16/fxcm-faces-losses-o...
I don't think this is a 'black swan' event. The strategy was pretty explicitly premised on a binary event: the Swiss bank keeping the peg or not. It didn't. As OP indicates, the possibility of the peg breaking was understood by anyone who actually understood the trades they were making. And it's not like central banks have never failed to keep a peg in the past...
A Romance language thing. In Spanish it's more obvious as it's more commonly used. If you have a plural noun the acronym has double letters. The United States is rendered as EEUU (Estados Unidos, pluraled) or The Olympic Games as JJ OO (Juegos Olimpicos, pluraled).
The reason brokers will give you this much leverage is that ForEx (up until a couple days ago) was one of the most liquid markets on the planet. If you hit a margin call, your broker could instantly liquidate your entire portfolio to cover any loss, with very little risk.
And then, the SNB walked away from their Peg, and the earth collapsed underneath all these traders (and brokers in some case) - All these traders/brokers who thought that a position could be liquidated at minimal loss, ran into a market with a scarcity (absence) of buyers, and were wiped for the entire value of their accounts (and more - lots of traders ended up with a negative position)
This is a wakeup call that people will remember or a very, very long time (and should have been learnt in the 2008 Mortgage collapse) - the potential for a black swan event is everywhere.
[1] http://www.investopedia.com/ask/answers/06/forexleverage.asp [2] http://www.investopedia.com/articles/forex/08/margin-leverag...