FX Brokerages

Interesting story about some of these brokers which went to the wall because of the Franc move on Thursday. What is ironic about this is that this may have killed them precisely because of the way these companies made money.

I caveat this is based on admittedly shaky knowledge of how these retail FX brokerage businesses worked and should be considered entirely based on hearsay and deduction, but the model as understood, was to offer huge leverage to clients, wipe their 'equity' out on some small volume based tick in the FX markets (while encouraging them to take long term positions based on research discussing 'exports' and 'non-farm payrolls'), take over their account, close it out with no real loss to the FX brokerage and pocket all the proceeds without real risk to the FX brokerage. This was possible because the 'spreads' (ie price between buy and sell) for these leveraged retail clients offered by the FX brokerages was far wider (and thus liable to their accounts being closed out) than the 'spreads' that the FX brokerages were able to get themselves with their use of the wholesale FX markets. They could take the 'maxed out' account, close it out in the market and pocket the spread.

This is what effectively killed them here, the limits were hit, they took over the accounts, found that even with the crap spreads they were offering their retail clients versus the wholesale market which the firm itself had access to, they still hadn't got anywhere near enough protection against a 25% intra-day move in a currency pair (which had shown low vol for months because of the cap) and then became exposed to the clients losses. Mostly you could go after the clients for their losses, but because of the model explained above, they couldn't because the entire model was built around closing out over-levered clients with no recourse (and taking the difference in the spreads offered when they closed out the account).

They probably had some funky VaR models which they were using to manage their risk in the overall book, because they would have had risk management, but clearly it wasn't working well enough, or it wasn't callibrated to foresee risk scenarios which according to the funky VaR models they used to manage their books, should only have happened once every 5 billion years. Or it wasn't factoring in what the clients were doing.  Maybe this could be an area of focus for the future given the new capital regime which disincentivises any regulated institution from taking any kind of risk on it's own balance sheet...

Maudlin machinations on Nationality

Living abroad and being British are two things that, given our past predeliction for setting off round the globe, should go hand in hand. British people, despite their intransigence and hostility to most things outside their immediate locality, have a long and distinguished track record of heading off round the world. Similarly, despite our aforementioned hostility to those things which are different, we've also been persistently changing our culture to accomodate a fascination with a broader world for the best part of two hundred and fifty years. Now having lived away from the UK for two years, it has been a fantastically interesting experience to observe the ways in which I and my fellow countrymen attempt to recreate a country that admittedly while it has many faults and which we all moan about, cannot be removed from our collective concious. It's almost like being part of some kind of cult, involving strange bland, unhealthy food and even stranger television programs with no potential of being accessible to anyone else on earth; consistently and mysteriously tapping at your pavlovian response node like a lab rat being stimulated by a button which reveals cheese. I would give a lot to be able to remove this nervous tic, but at the same time, I know that its a part of everything that makes people special and interesting to be around. It goes with a culture that is totally heterogenous but at the same time, homogenous. I say this insofar as, despite a lack of common accent, you can immediately identify a "British" person when speaking to them. This is not to say that you immediately strike up a witty conversation in the style of Evelyn Waugh, or even that you in anyway warm to the person in question. It is more like the realisation of a common affliction; "Oh fuck, you're one of them (and by them I mean us)..." The realisation comes quickly, the topics even quicker, the obsession with house prices, the discussion of educational attainment and standards, the shameless oneupmanship and the backhanded compliments, the food discussions, the entertainment observations, the references to utterly obscure art pieces and cultural figures. All of these form a non-exhaustive list of the common factors but there are many others, I can't list them all, if you're British and have lived away, you'll know them. Which is why juxtaposing this strange interaction ritual unique to the British with the behaviours of those from other countries produces an interesting isolation and sense of cultural inferiority. Maybe the role of English as the new 'Lingua Franca' of the modern world, which effectively gives you the benefit of virtually always dealing in your mother tongue but also, at the same time not having a language truly of your own to speak in. I think there is a strange paradox here in that native English speaking people continue to bastardise their own language in the vain hope of creating something that others can't listen to and which is unique to them. However, at the same time, the pressure for conformity which comes from speaking such a widely used language pushes them back to speaking in the venacular which was bestowed upon them. For every person adding new and strange additional words to the language, cutting short sounds and mispronouncing other words the collective pressure of our omnipresent mother tongue drives them back from whence they came. With other languages more variety and subtext seems possible. I guess there is no real point to this ambling monologue, other than to record for my own purposes my own feelings on this cold day in Zurich, in this two thousand and fiifteenth year of our lord, sipping whiskey and listening to a collection of music selected for me by a computer based on my own music tastes, which reveals my own maudlin nature having spent two years observing myself and everyone else from a Swiss perspective. I leave with the words of Arcade Fire singer Régine Chassagne; "I started singing and they told me to stop, Quit these pretentious things and just punch the clock, Sometimes it feels as though the world is so small, Will we ever get away from the sprawl"