Retail Spot FX traders tend to be highly leveraged, with many traders making use of leverage in excess of 100:1. While this allows traders to make impressive profits when the markets move in their favour, it also means that traders can be exposed to heavy losses should the market move against them. When trading with a brokerage who operates using a Non-Dealing Desk model (STP/ECN Brokers), in certain circumstances traders may face heavy losses should the market move against them. When there is a lack of liquidity, it may not simply possible for the broker to close a position at traders stop loss or at the level where thy have no remaining equity. This can lead to traders facing negative balances, essentially meaning that the trader owes the brokerage money.
Some brokerages will pursue clients to recover these negative balances. This means that traders can potentially be pursued via the courts and by debt collection agencies, so that the brokerage can recover the money which it likely owes to it’s liquidity providers. In the past this has led to traders facing bills many times in excess of the capital which they deposited into their trading accounts.
Not all brokerages, pursue traders who end up with negative balances due to dramatic market volatility. These brokerages are said to offer their clients negative balance protection, which means that the broker will cover any losses faced by clients. This provides traders with important protection should their be dramatic moves in the market which end up wiping out clients, and pushing their balances into negative territory. A prime example, would be in when January 2015, an extreme move in the Swiss Franc left many traders facing negative balances in excess -$200,000. Luckily, many of these traders where trading with brokerages who offer negative balance protection meaning they wouldn’t be pursued for these huge debts.
Negative Balance Protection Brokers
Not all brokerages offer negative balance protection, as this can pose a risk to them should their be extreme market movements which leave large numbers of their clients with significant negative balances. Despite this there are a number of regulated brokerages which offer their clients negative balance protection. For many traders negative balance protection will be an important selling point and this traders should check the Terms and Conditions of the brokerage they are looking to trade with. It is also important to remain up to date with any changes to the terms and conditions, as developing events may lead brokers to renege on their commitment to offer negative balance protection.