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January 15 will go down in history as one of the craziest days in currency markets. The Swiss National Bank (SNB) did a U-turn by abandoning its EUR/CHF 1.20 peg, resulting in the Swiss franc surging against the euro, with quotes plunging more than 50% to as little as 0.5696.
Retail trading platforms were the worst hit – some even went bust – but those that survived are facing scrutiny from customers and regulators as to what exactly happened in those crucial minutes after the announcement.
IG, in particular, is facing questions from some clients over its 10-minute delay in trading out of client risk after the SNB move, and why its platform, in particular, suffered such a severe liquidity crunch compared with its peers.
IG is the poster child of spread-betting firms: its website boasts of over 125,000 clients; a market capitalization of more than £2 billion; and it has made it into the respectable FTSE 250.
It is expanding all over the world, most recently in the Netherlands, and even launched its first trading app for the Apple Watch. IG has won MoneyWeek’s award for ‘best forex trading platform’ three years in a row.
In January, retail FX brokers experienced extreme market moves.
The SNB pulled the plug on its peg at 09:30 CEST, sparking a frenzy of trading. IG executes 99.2% of trades in 0.1 seconds, according to its website, and yet it has transpired it did not start trading for its customers for more than 10 minutes.
The group claims IG offloaded its own risks ahead of those of its customers’ which they claim is contrary to best execution Natalia Chumak, Signature Litigation |
In a March letter, seen by Euromoney, in response to a client complaint relating to the SNB trading day, IG maintains its platform was fully functional during the extreme market moves and operated as advertised.
It adds: “… Many trades were being automatically rejected because there were no bids in the underlying markets and the banks had withdrawn their pricing feeds.”
Some customers were left scratching their heads. How come IG claimed there was no liquidity in EUR/CHF, and yet other major retail players, such as FXCM, were able to trade approximately $200 million in total volume in the 1.17 and 1.20 range in the first minute?
Correspondence from IG's compliance department in April to a client disputing a negative SNB-related balance, and seen by Euromoney, shows that, out of 13 counterparties IG could have traded with in January, it traded directly with three dealers: Barclays, Deutsche Bank and Morgan Stanley. All three banks declined to comment for this article. IG was not plugged into EBS. Icap’s EBS platform is recognized as one of the best platforms for trading the Swiss franc and one of the most important multi-dealer platforms for trading foreign exchange. The same April correspondence shows that IG relied on a platform called IGFX, which aggregates prices from a range of 12 liquidity providers.
An April email sent by the IG compliance department, and seen by Euromoney, states the broker started trading at 09:32 – for itself. IG traded between 09:32:41 and 09:39:44 to “manage and hedge” its own exposure within the underlying market, before it executed client trades as an aggregate order, says the letter.
This delay meant IG’s customers got a worse price for their trades than broker did on its own trades, say some clients.
Significant losses
Natalia Chumak, a partner at Signature Litigation in London, is acting on behalf of a group of clients who suffered significant losses.
“IG has a contractual and regulatory obligation to provide best execution,” she says. “The group claims that IG offloaded its own risks ahead of those of its customers’ which they claim is contrary to best execution.”
An IG spokesperson says it was neutral to the franc at the time of the announcement and executed all of its hedges to close out exposures which resulted from client positions, in the “best interests of IG clients”.
Once it had managed its own exposure, it bundled up client trades across various Swiss franc crosses, including EUR/CHF and USD/CHF, into one €115 million order at a final average price of 0.9255, the spokesperson says. IG then slapped on a spread – the price it gave to clients after trading in the underlying market was 0.9250, the spokesperson adds.
Some IG customers had put on stop-loss orders in advance, to stem their losses if the Swiss franc moved considerably. IG automatically executes these, but in its terms and conditions IG states it reserves the right to execute them manually if certain pre-defined dealing rules are breached.
In the April correspondence to a client, IG stated it had instituted so-called ‘concentration checks’ – a process whereby a given number of orders above an undisclosed threshold are subject to manual, rather than automatic, processing at a client’s requested stop level.
This came as news to some of IG’s customers; some of whom claim had never previously been told about these checks, with the manual processing resulting in a poorer price and higher losses on Black Thursday.
The reference to concentration checks is not included in the terms and conditions or IG’s summary execution policy, says Chumak.
An IG customer says: “It is the reason we did not get filled. How can we accept such critical trading logic (which would have definitely affected our trading strategy and appetite) not being made transparent to us?”
Immediate aftermath
The IG spokesperson declined when asked to clarify why some of its clients suffered a 10-minute delay in trading orders when many of IG’s competitors traded in the immediate aftermath of the SNB decision.
The spokesperson also declined to detail its trading relationship with its liquidity providers or shed further light on IG’s concentration-check and aggregation policy, respectively, in relation to the events on Black Thursday.
Chumak’s clients have detailed their findings in a complaint to the Financial Ombudsman Service (FOS), which can force IG to compensate customers up to a maximum of £150,000 each. The group also claims that IG’s terms and conditions are unreasonable and, as such, are contrary to the Unfair Contract Terms Act 1977.
“If my clients’ complaints are not resolved by the Financial Ombudsman Service, there is a possibility of litigation,” says Chumak.
An IG spokesman says it is providing necessary documentation to the FOS and will not engage in “media speculation”.
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Dominic Lindley, former leader of Which? Financial Services’ policy team and now a consumer advocate, attempted to orchestrate a meeting with IG’s affected customers and the Financial Conduct Authority (FCA), but to no avail, he says.
“The regulator should be open to meeting with clients to discuss their experiences and to gather evidence about what happened.”
An FCA spokesperson tells Euromoney it can’t comment on specific investigations, but the regulator is understood to be looking at the performance of forex platforms in relation to Black Thursday.
A customer who is still disputing a negative balance adds: “If IG has nothing to hide, they should put all the information out there and be open and consistent. Sometimes they just ignore or refuse to answer questions. They delay, obfuscate, hedge, caveat … if necessary, just to drag it out and pick people off one by one.”
An IG spokesperson concludes: “The majority of the accounts concerned are now cleared and IG is encouraging any remaining affected clients to make contact so that their individual circumstances can be taken into account in reaching a mutually agreeable resolution.”