What effect will increase of spread have on equity?

[Thomas4]

How I lost all positions in one second.
It happened on Monday, August 24th, 2015 at 13:34 GMT. I traded with CFD (Dow Jones). The volume of my buy positions was almost equal to the volume of my sell positions and the margin level was since hours more than 55%, so I thought I had nothing to fear if the rate would drop suddenly. Because only below 20%, a position can be closed by my broker. At 13:30 I saw that the rate was going down very fast in those minutes, and then suddenly: all my positions were closed by my broker. In one second. I called my contact person, a trading specialist of my broker. At that moment he could not tell me why the positions were closed, but after a couple of days he told me: at that time my broker had increased the spread very much (from 3 till 116) and because of this the equity of my account became too low, he told me. Therefore, the positions were closed by my broker, according to the contact person.

I could not understand this and still I don’t understand. That increase of spread will have effect if I had opened a position at that time I can understand, but during this time I didn’t open or close any position, so that increase of spread will have effect on equity I don’t understand. My contact person doesn’t want to give me further explanation, so I want to ask: Can anyone of the readers give me explanation? Who can help me? Thank you very much in advance!

 

[tomorton]

24/08 was one of the most volatile days ever recorded in some markets. When prices are so volatile and unpredictable, brokers widen their spreads to reduce their risk. This means the buy price goes up and the sell price goes down, so that they are not selling cheap and buying dear. This increases the level of margin you would need to cover the position.

Days like the 24th are not too common, but brokers make smaller adjustments in spreads frequently, and as well as margin requirements, this can cause you to be stopped out unexpectedly. e.g. you bought at 95, when the spread was 93-95, and you put a stop loss order at 90. Then the broker opened the spread to 10, perhaps because of some expected news announcement like US Non-Farm Payrolls. The bid/ask spread is now 89-99 and you will be stopped out. However, if you look at a chart based on mid-prices, this will show price never varied from 94.

 

[options-george]

Hi Thomas. I think Tomorton explained it really well as to why you were stopped out.

Sorry to hear about your bad luck that day. Unfortunately days/situations like that will and do happen in the financial markets.

 

[Thomas4]

Hi tomorton, you wrote: "and you put a stop loss order...".
But no position was closed by SL / Stop Loss or TP or in another way.
How can you explain that equity drops (as my broker says) while volume of buy en sell positions is equal and remains the same?

 

[timsk]

Hi tomorton, you wrote: "and you put a stop loss order...".
But no position was closed by SL / Stop Loss or TP or in another way.
How can you explain that equity drops (as my broker says) while volume of buy en sell positions is equal and remains the same?

Hi Thomas4,
If I've understood you correctly, you've got one or more buy orders open and one or more sell orders open simultaneously so, in effect, you're neutral. Additionally, you have no pending stop loss or take profit orders. Due to the exceptional volatility, your broker widened the spread from 3 points to a massive 166 points, at which point your positions were closed.

If the above is an accurate summary of what happened, then your answer lies in the massively increased spread. Depending on where your various orders are - in terms of their proximity to one another - the platform software calculated that there wasn't sufficient margin available in your account to allow the orders to remain open with the revised spreads. As Tom says, the volatility on the day in question was quite exceptional, nonetheless, I've not heard of any broker widening the spread by such a large amount. I traded the Dax that day and the spread remained at 1 point throughout, although my fills were often poor as a result of slippage. But that is to be expected given the volatility. Your gripe is with your broker and whether or not widening the spread to such a degree was fair and reasonable. Do their terms & conditions mention anything about this? Personally, if my broker did that, I'd complain loudly and ask for my account to be credited with any losses. Failing that, I'd take my business elsewhere and choose a broker with a fixed spread.
Tim.

 

[Thomas4]

Hi Timsk, Thank you very much for your reaction. Your summary is right.

I doubt:
1) was it fair and reasonable of my broker (NOT FxPro) to increase the spread so much?
2) did the platform software calculate correctly that there wasn't sufficient margin available in my account?

In the trading conditions of my broker is written that spreads are dynamic and may change according to market condition. In the conditions is not written that widening of spreads can have effect on equity and I have never received information about this from my broker.

Of course I’d like to be credited by my broker with the losses, but first I want to calculate: how much was the margin level when the positions were closed. It deals with a very large sum of money, so I want to spend much time (and may be money) in this question. Please, can you help me with calculating the margin level? First I’d like to know with which formule I can count the profit or loss of a lot.
Following data are of some months ago (at that time these positions were not closed):

Open Time Type Size Item Price Close time Price Commission Taxes Swap Profit
2015.05.19 07:10:06 buy 0,05 usa30 18318,5 Still open 17901,5 0 0 171,97 -1850,45
2015.05.19 11:40:11 buy 0,05 usa30 18309 Still open 17901,5 0 0 171,97 -1808,3

Or here in CSV format:
Open Time;Type;Size;Item;Price;Close Time;Price;Commission;Taxes;Swap;Profit
2015.05.19 07:10:06;buy;0,05;Dow Jones;18318,5;Still open;17901,5;0;0;171,97;-1850,45
2015.05.19 11:40:11;buy;0,05;Dow Jones;18309;Still open;17901,5;0;0;171,97;-1808,3

So what is the formule to count the profit mentioned above?

 

[timsk]

Hi Thomas4,

I doubt:
1) was it fair and reasonable of my broker (NOT FxPro) to increase the spread so much?
2) did the platform software calculate correctly that there wasn't sufficient margin available in my account??

1) Well, I agree with you and I imagine most other traders would too. However, presumably, your broker thinks otherwise. Have you phoned them and voiced your concerns? If so, what did they say?
2) Mistakes do happen, but I'd be surprised if an error in the platform software turned out to be the cause of the problem.

In the trading conditions of my broker is written that spreads are dynamic and may change according to market condition. In the conditions is not written that widening of spreads can have effect on equity and I have never received information about this from my broker.?

Based on this, they reserve the right to widen spreads in certain market conditions, and the conditions were most unusual on the day in question. The $64,000 question is whether widening them to the extent they did was fair and reasonable.

Of course I’d like to be credited by my broker with the losses, but first I want to calculate: how much was the margin level when the positions were closed. It deals with a very large sum of money, so I want to spend much time (and may be money) in this question. Please, can you help me with calculating the margin level? First I’d like to know with which formule I can count the profit or loss of a lot.
Following data are of some months ago (at that time these positions were not closed):

Open Time Type Size Item Price Close time Price Commission Taxes Swap Profit
2015.05.19 07:10:06 buy 0,05 usa30 18318,5 Still open 17901,5 0 0 171,97 -1850,45
2015.05.19 11:40:11 buy 0,05 usa30 18309 Still open 17901,5 0 0 171,97 -1808,3
So what is the formule to count the profit mentioned above?

I can't really help you with this I'm afraid, not least because I don't know your broker, their margin rates, the number of positions you had open at the time or the size of the trades etc. Besides, I'm not good with numbers! I suggest you phone your broker and ask them to provide the figures you require, along with their justification for closing the trades. My guess would be (but it is only a guess), that their figures will stack up. If so, it then boils down to the spread and whether or not it was excessively wide.

Presumably, there are other people in the same boat as you, as I'm sure loads of other people will have traded the Dow that day. In your shoes, I'd try and make contact with them, as there's strength in numbers and it will be harder for the broker to ignore a whole group of clients.
Tim.

PS. this may be of some help: Leverage and Margin