By Tommy Stubbington And Chiara Albanese
When the Swiss National Bank suddenly let its country's currency
rocket on Jan. 15, Pawel Jaworski, a welding engineer from Elblag,
Poland, was a loser.
Using an online account with Copenhagen-based Saxo Bank A/S, Mr.
Jaworski had bet the Swiss franc would fall. He closed his trade
with a loss of EUR1,000 ($1,148). "I thought, 'I'm not the winner,
but it could be worse,' " said Mr. Jaworski.
It was.
That evening, Mr. Jaworski, 38 years old, checked his account
again. Saxo had changed the price at which his trade was executed.
He was out an additional EUR2,000. "This is two or three months'
wages; this is money that I don't have," he said. The central bank
had removed the franc's peg to the euro, allowing the currency to
rise, ahead of the European Central Bank's launch of a bond-buying
program to boost the eurozone's economic prospects.
Saxo said any losses are its clients' fault. It said its
business terms explicitly grant it the right to revise prices after
trades have been closed. "I think it was a fair way of dealing with
it," said Steen Blaafalk, Saxo's chief financial and risk officer.
"Clients that lost money can blame us, or they can blame
themselves." Saxo said it doesn't comment on individual
clients.
January's swing in the franc was the biggest move in the modern
history of developed-market currencies. It jolted money managers,
corporate treasurers and central banks around the world. It cut an
especially vicious swath through the world of retail
foreign-exchange brokers, who let mom-and-pop investors borrow
heavily to fund risky bets.
Some brokers have taken huge losses. Others have shut. Some have
forgiven loans made to clients. Denmark's Saxo Bank has taken an
aggressive approach.
According to the firm's communications reviewed by The Wall
Street Journal, client trading records and interviews with
customers, Saxo has retroactively repriced some trades and is
chasing its own customers for about $100 million in losses.
Repricing of individual trades isn't unknown in the industry,
but the altering of large numbers of trades by such a big margin is
highly unusual.
Denmark's financial-services regulator last week ordered Saxo
Bank to provide details of its handling of Swiss franc trades on
Jan. 15. The regulator declined to comment.
The big losses are a consequence of how retail brokers operate.
Foreign-exchange markets are relatively placid. A 1% daily move in
a currency, commonplace in stocks, is exceptional.
To magnify trades, brokers let clients put up a little cash and
borrow the rest from the broker, known as margin trading. That
enables an investor to leverage a smaller position into a bigger
one. If the holdings rise in value, the margin will magnify gains.
Likewise, if the assets decline, the losses are amplified.
In some cases, clients can trade amounts more than 100 times the
actual cash they deposit.
Some Saxo customers were able to trade at a 25-to-1 margin
ratio, meaning they could make a $10,000 wager on the Swiss
currency by using only $400 of their own money. When the franc
soared about 30% against the euro in the minutes following the
central bank's decision, many customers were clobbered far in
excess of the cash they had put up. That is money they now owe the
broker.
Many Saxo customers said they can't afford to pay and have been
treated unfairly.
One issue is Saxo's decision to recalculate the exchange rate at
which losing bets were closed. The bank said the move was made to
better reflect the market's chaotic conditions that day.
Wagering about $25 for each $1 put up, Tay Lip Sing, a
44-year-old technology consultant in Singapore, bet the franc would
fall against the dollar. He set an automatic limit, called a
stop-loss order, to close his trade if losses got too large,
according to Mr. Tay and account records reviewed by the Journal.
The franc climbed 18% against the dollar soon after the central
bank's move.
Mr. Tay said after the Swiss National Bank acted, he sighed in
relief that he had set up the stop-loss order. His loss, he said,
should have been about $900. But Saxo later told him the trade
closing his position had been revised to a price well beyond the
stop-loss order. Mr. Tay was out $22,800. The money was deducted
from his Saxo account.
"It is like buying a ticket with British Airways for $1,000 and
then finding out that the price of the same seat has been changed
to $20,000," Mr. Tay said.
U.S. regulators have moved to temporarily restrict the amount of
borrowed money used by currency traders, while some brokers have
said they would increase margin requirements.
Saxo promotes a vision of individual responsibility free from
government intrusion. The firm hands out copies of "Atlas
Shrugged," Ayn Rand's hymn to individualism and capitalism, to
employees and clients. It offers a free copy of the Danish
translation of the novel to anyone who fills out a form on its
website.
But Saxo's move to reprice trades runs contrary to some its own
marketing materials. On its website, it promises "dedicated
liquidity" and "no slippage" to users of its foreign-exchange
trading platform.
"With Fixed Spreads from Saxo Bank, you don't have to wonder
what price you'll pay to trade FX," the website said, using the
shorthand for foreign-exchange trading.
In recent days, Saxo has tried to make a deal with some
customers, offering discounts to the balance Saxo has said they owe
if they pay promptly and don't sue, according to interviews with
customers and correspondence reviewed by the Journal.
"We are actively working with clients to find a plan of action
for repayment," Mr. Blaafalk said.
"I sincerely feel sorry for any client that suffers losses, and
I understand investors were surprised because the move was just so
extreme, " he said. "Now is the right time to come to an agreement
with each individual client, and then we can all move on."
At least one other provider is chasing clients for money it is
owed. U.K.-based IG Group Holdings PLC said it suffered a hit of as
much as GBP30 million ($46 million) from the franc move, including
GBP18 million owed to it by customers.
IG didn't reprice trades, but many customers are unhappy they
were able to run up unexpected losses when their stop-loss orders
weren't carried out at the prescribed price.
In letters to clients reviewed by the Journal, IG blamed the
situation on a lack of available trades in the market on Jan. 15
and the large number of client orders it needed to cancel.
Marcel Zidani, a concert pianist from Evesham in the U.K., is
being asked to pay more than GBP4,000 to IG after a bet against the
franc turned sour. Mr. Zidani, 41, had a stop-loss order, but it
took about 45 minutes to execute the trade, causing the transaction
to be executed at a much lower price.
"When the SNB hit, I was flabbergasted and in a state of shock;
I just saw the losses piling up on the screen," he said.
IG declined to comment on client losses.
Other brokers have been more charitable.
FXCM Inc. said last week that it would forgive loans made to
small traders. Its customers in total owed it $225 million after
the franc move. The New York firm received a $300 million rescue
loan from Leucadia National Corp. to continue operations after the
client losses threatened to put it in violation of regulatory
capital rules.
Toronto-based Oanda Corp. said it didn't reprice any trades
after the franc move and isn't trying to claw back cash from
clients. "We felt the right thing to do was forgive the losses,"
Chief Executive Ed Eger said.
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