Saxo Bank certainly didn’t do its EUR/CHF traders any favours
In documents ForexLive published yesterday, Saxo Bank attempted to explain their price fills on the EUR/CHF breakdown and that they would be prepared to take legal action to recover negative balances.
Saxo officials also confirmed that they re-priced retrospectively in other reports.
I’m no lawyer but there are parts of it that stink.
1. They are averaging out trades to customers based on where Saxo got filled
- So where were Saxo’s stop orders prior to the move that covered their risk, and where did they get filled?
- If they had no prior orders then they must have been scrambling to get filled during the move. On a risk basis that’s outrageous. On an ECN basis that’s even worse
- If they did have stop orders in EBS then as far as I’m aware EBS is first in, first dealt. I’d be pissed if I had a stop in place from 3 years ago that got filled at the same average or worse than someone who automatically had their positions closed. They’ve given 3 levels of prices so I’d be expecting to be filled at the higher one if my stop was placed a long while back
2. They are synthesizing fills for other Swiss pairs
Are you kidding me?
It sounds like Saxo didn’t actually trade in the market for other Swiss pairs but made up fills based on the averages for EUR/CHF? I thought Saxo Bank was an ECN?
If that is the case then I suggest that Saxo clients read up on their T&C’s to see whether Saxo have detailed that as a policy in filling client orders. If it’s there then it sucks big time. The issue is that if they don’t fill clients in the market then how did they fill customers? One possibility is that they took the other side of the trade on themselves so in effect buying Swiss pairs at the bottom of the market. That’s not the work of an ECN.
How it’s supposed to work
For clarity here’s how it works, from my days in the pits, and from a certain former interbank dealer, who I’ve checked with and who knows his onions too.
If you can’t make a trade in an illiquid contract/currency then you can “leg” the trade. In currency terms, for trading USD/CHF you would trade the most liquid pairs, i.e EUR/CHF and the opposite way in EUR/USD. That gets you a USD/CHF trade. If you are a market maker you could also take the trade entirely on your own book and fill the client, or you could leg half the trade in the market and take the other side on your own book, if it was in your favour.
Now, in the SNB move, to sell USD/CHF, a trader would have sold EUR/CHF at the earliest opportunity and then bought EUR/USD. Now remember that EUR/USD was falling also it would have potentially meant a better entry point for that leg. Trading like that is an art form rather than a precise science but it can improve a position immensely if played right.
IF they filled customers that way then they are royally screwing people over as they are trading in the market for some positions and not for others and potentially not in the best interests of their clients. Again though, that’s a matter for the T&C’s
This Saxo issue is important because it is giving us the first idea on how fills were accomplished over that period and how brokers may have been pricing trades, something that has not come out in the public eye from other brokers. This is one instance though and not a complete template to use for others. Other brokers use other liquidity providers and even using the same ones could have been filled at different levels.
What Saxo’s statement does do is raise more questions than it answers. It questions their risk strategy for Swiss trades as it seems they didn’t have stop orders in the market for customer orders, according to the statement on pricing.
I want to make clear once more that these are questions I am raising because some things don’t add up in my experience of being in markets for as long as I have. This isn’t a direct attack on Saxo and they may well be right in everything they have done and played this by the book and their terms and conditions. They have put their response out and I’m passing comment on it. If anything, the least I hope to do is to try and explain how things work so that people can form their views and have an idea of what to look for in their own personal situation, if affected by the SNB move.