# Liability if market gaps



## Kylie9090 (21 January 2015)

Hello, 

Quick question.  What happens, for example, if you have $1,000 in your trading account.  And you have a trade position open which gaps and goes past your stop loss.  What if the price continues to drop sharply so that it not only eats up all your $1,000 but continues to drop.  My question is, are you liable for more than the money you have in your trading account?  Can they come after you for more money legally?


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## cynic (21 January 2015)

Kylie9090 said:


> Hello,
> 
> Quick question.  What happens, for example, if you have $1,000 in your trading account.  And you have a trade position open which gaps and goes past your stop loss.  What if the price continues to drop sharply so that it not only eats up all your $1,000 but continues to drop.  My question is, are you liable for more than the money you have in your trading account?  Can they come after you for more money legally?




Close examination of the product disclosure/client agreement documentation of one's chosen broker/service provider should yield a definitive answer to this question.

Based upon my experience of numerous brokers etc. the answer to your question is almost invariably yes! 

However, I've occasionally noticed some providers offering specialised accounts and guaranteed stop losses that limit client liability in the event of gaps or slippage.


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## So_Cynical (21 January 2015)

Reading a little about the recent Swiss currency event it would seem that the brokers/Bookies are legally covered and can simply roll back any overly damaging trades and pass on the losses to their clients...sucks hey.


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## Kylie9090 (21 January 2015)

I only realised this recently.  It's a bit of a worry.


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## cynic (21 January 2015)

Kylie9090 said:


> I only realised this recently.  It's a bit of a worry.




It certainly is! 

Given that one cannot fully rely upon a stop order for protection in extreme market conditions (or outside of market hours), it highlights the importance of being well aware of the full exposure and associated liability of any leveraged position one might choose to open (irrespective of stop placement).

Last year I was incensed when I observed a "gentleman", whom, whilst purporting to be a professional trader, instructed a room full of people that a forex trader could never lose more than the actual funds in their account. Upon being asked whom would be liable for the deficit in the event of a sizable market gap, he responded with vague comments to the effect that ASIC had done "something" to make it so.

Needless to say, further enquiries revealed his advice to be quite untrue.

Sadly aforementioned "gentleman" continues to promote expensive weekend seminars on "Forex Trading".


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## darkhorse70 (21 January 2015)

On a similar note, say for ex a brokerage firm like IB went bust by some catastrophic economic event, would people who have accounts with them lose their cash.

I think it was in the agreemente some where which I failed to read through lol. Ill have to read back up om it.


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## tech/a (21 January 2015)

darkhorse70 said:


> On a similar note, say for ex a brokerage firm like IB went bust by some catastrophic economic event, would people who have accounts with them lose their cash.
> 
> I think it was in the agreemente some where which I failed to read through lol. Ill have to read back up om it.




If a catastrophic event closed IB just about every other broker would crash before them.
They have $100k cover on every account under 100k---but then if the insurance industry crashes.

Now where was I in my Prepping!


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## pavilion103 (21 January 2015)

My money is all under my bed now


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## skc (21 January 2015)

Kylie9090 said:


> Hello,
> 
> Quick question.  What happens, for example, if you have $1,000 in your trading account.  And you have a trade position open which gaps and goes past your stop loss.  What if the price continues to drop sharply so that it not only eats up all your $1,000 but continues to drop.  My question is, are you liable for more than the money you have in your trading account?  Can they come after you for more money legally?




Short answer is it depends. Most it's safe to assume that "Yes, you have incurred a legal liability" as far as most brokers are concerned.

Most brokers/CFD providers highlight that "losses can be greater than your account balance".

Although there is at least one broker out there who seem to offer some form of downside protection. But you can be sure that such protection is not free and you are paying for it one way or another.

http://www.oanda.com/


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## payday (21 January 2015)

pavilion103 said:


> My money is all under my bed now




That's great to know pav. FYI - I offer a completely free mattress flipping service. Give me your address and times that you are not at home (so as not to inconvenience you) and I will personally flip your mattress for you - the health benefits from mattress flipping are amazing! This offer extends to everyone else who also likes their cash under their beds!

On a slightly more serious note IB is member of SIPC - link here : http://ibkb.interactivebrokers.com/node/1968
I have set my options to sweep any excess funds into the security account, but there is always the question of whether SIPC will cover you if you only trade futures (like I do).


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## darkhorse70 (22 January 2015)

Thanks John.

Payday, too many loopholes. Lets just hope it never gets to that point haha.


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## nulla nulla (22 January 2015)

Kylie9090 said:


> Hello,
> 
> Quick question.  What happens, for example, if you have $1,000 in your trading account.  And you have a trade position open which gaps and goes past your stop loss.  What if the price continues to drop sharply so that it not only eats up all your $1,000 but continues to drop.  My question is, are you liable for more than the money you have in your trading account?  *Can they come after you for more money legally?*




The answer to your question is a definite "Yes". They can and will come after you. Also there is likely a provision in the "terms and conditions" of your account where-in they are entitled to apply interest to the balance due from the time the balance was due until such time as you pay.


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## Pnut (30 January 2015)

Just such a scenario has happened over the last few weeks with the Swiss frank trades. The gap in the FX market that isn't supposed to happen happened. I received a letter from FXCM and Axitrader to verify that they had enough cash to continue but beware about the other guys that have not come forward yet.
It would appear to me that they had to honour the guys that made a profit and swollow hard on the guys that blew their account.
Raises a few eyebrows for Aus banks that have FX desks some of them would have to have been on the wrong side.
My thoughts only.
Pnut 




> Dear Valued Client,
> 
> A message from Goran Drapac, Chairman and Chief Executive Officer of AxiCorp Financial Services Pty Ltd:
> 
> ...






> Dear Client,
> 
> FXCM Client Accounts Secure – Raises $300 Million in Capital
> 
> ...


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## tech/a (30 January 2015)

Not really

Banks make billions in profit each year.
A once in a blue moon outlier of $300 million
Would just be annoying and a tax write off.


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## Pnut (30 January 2015)

tech/a said:


> Not really
> 
> Banks make billions in profit each year.
> A once in a blue moon outlier of $300 million
> Would just be annoying and a tax write off.




Yeah right.

Maybe you could send LLoyds Bank your memo to cheer them up about the London Whale.
I guess it was only the share holders who paid out for that one. No doubt all the staff got paid their bonuses.

Also NAB isn't exactly forthcoming about the $200B worth of US Mortgage Backed Securities they purchased in 2001. I have looked but can't find the details of what happened. I do remember the front page ad they got for buying the debt and how the CEO with an American accent on the day was praised as some sort of Messiah. I guess we will see the true colours before the 20 - 30 year loans mature. LOL.

Pnut.


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## tech/a (30 January 2015)

Pnut said:


> Yeah right.
> 
> Maybe you could send LLoyds Bank your memo to cheer them up about the London Whale.
> I guess it was only the share holders who paid out for that one. No doubt all the staff got paid their bonuses.
> ...




Why the angst?

Its business.




> US Mortgage Backed Securities they purchased in 2001. I have looked but can't find the details of what happened




Your talking about Credit default swaps.
Bought down Freddie Mac and Fanny Mae's
These are manufactured derivatives.

A great read on the topic is 
"The Crisis of Overcrowding"

http://ludwigbc.com/books/crisis-of-crowding/




> Maybe you could send LLoyds Bank your memo to cheer them up about the London Whale.




How can you compare the two?
One is a trader who hasn't been reigned in on risk by his own desk and the other a currency policy decision by the bank.

http://ftalphaville.ft.com/2015/01/28/2102062/why-did-the-swiss-franc-spike-blame-the-locals/


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## Pnut (30 January 2015)

> How can you compare the two?
> One is a trader who hasn't been reigned in on risk by his own desk and the other a currency policy decision by the bank.




Sorry I am only comparing the 2 in a trading sense. 

As you should know a loss is a loss.



> Not really
> 
> Banks make billions in profit each year.
> A once in a blue moon outlier of $300 million
> Would just be annoying and a tax write off.




 I am sure the London Whale was following the Banks Policy decision. He just got caught out because they hit their limit and could not roll over the contracts. The once in a blue moon loss became more then annoying. Just as the Swiss Defending their level become hopeless and Swiss Bank paid for it. The Big 4 here are as incompetent as any other Bank I can assure you of that.

Also no Company Exec willingly comes out and talks down the share price by being honest but all Company Exec's will do a big song and dance for the media to promote the underlying share price with the tiniest bit of good news they can find because that' s their job.
It's not considered dishonest just not honest.

Pnut.


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## Pnut (30 January 2015)

Just received a follow up letter from FXCM which may help to highlight my point of honesty and how company's put a glossy shine on rotten apple. It's a lengthy letter of reassurances but here is what relates to the question of Liability if market gaps.   



> Negative Balances Update
> 
> One of the most pressing issues following the SNB historical decision to remove the 1.20 floor on the euro has been to work diligently to reach a decision on client Debit Balances following that event. At this time we are happy to report that FXCM has forgiven the majority of clients who incurred Negative Balances. FXCM has notifed the applicable clients and adjusted client account statements to reflect this decision.




Now what really is happening here and what is the truth of what has happened.

My opinion if honesty was the best policy, what should have been said is something like.

" We at Bank ....... can't afford to chase bankrupt customers for the money they owe us if we tried our own lawyers would surely teach us a lesson in economics. 
Please don't take your cash and close your account we need as much cash as we can get to stay afloat.
We at the top have our fingers and toes crossed that nothing else happens before we get our bonuses in late March.
Thank you for being a simple minded customer refer your friends.
The Management."

As I mentioned this is a big deal and we have only heard from the unlucky ones who can't afford to with hold information or roll over contracts to cover their losses and blur the facts.

I am suspect of all banks because they all hold hands together and sing from the same song sheet just different times of the day.

My thoughts only.
Pnut


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## tech/a (30 January 2015)

Pnut said:


> Just received a follow up letter from FXCM which may help to highlight my point of honesty and how company's put a glossy shine on rotten apple. It's a lengthy letter of reassurances but here is what relates to the question of Liability if market gaps.
> 
> 
> 
> ...




No further comment from me.

Time better spent watching the lawn grow.


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