IG has come under attack from a group of clients who claim their "disastrous" losses on EUR/CHF are the result of the retail FX broker's trading platform failing and its inability to provide best execution to everyone.
The allegations centre around the 30% drop in EUR/CHF on January 15, after the Swiss National Bank (SNB) unexpectedly pulled its minimum exchange rate for the franc. The dispute is focused on whether IG, a principal broker, acted quickly enough to execute stop losses, which it says are the best way to manage risk for retail customers.
Emails seen by FX Week from IG to customers inform them positions were closed out at 10:19am, some 40 minutes after the SNB move, as the broker scrambled to aggregate orders from accounts that went into the red.
This suggested to me they had high confidence in their ability to provide liquidity
Jan Nowak, a client involved in the dispute, had three long positions on the cross, with trades worth £600. His forward trades were stopped out at 0.9235 and 0.9217, despite him placing a stop loss order 50 points below the 1.20 floor. As a result, he currently owes IG £21,171.
"I may not be a good trader, but I never imagined this could happen. IG wasn't offering guaranteed stop losses in the franc, but it was still offering 100:1 leverage when I placed the trade," says Nowak. "This suggested to me they had high confidence in their ability to provide liquidity."
"I put a stop loss 50 points below my position and I believed IG's website about these steps being sufficient to manage my risk. Their website says IG is a trusted provider in volatile times with a state-of-the art platform and their guidance on slippage suggests a maximum of 100 points," he adds.
The slippage, as it turned out, was more in the 1,000 points range as IG struggled to execute some £150 million of aggregated client orders, which it aggregated manually after the broker's algorithm shut down automated execution.
"Yes, this was extreme slippage and we understand the frustration on the part of customers who were affected," says Kieran McKinney, director of investor relations at IG Group. "IG and the broader industry recognised three years ago, at the time the floor was introduced, that there could be some additional risk associated with the Swiss currency and we were unable to offer guaranteed stop losses to clients to reflect this."
He adds: "We also only offered 100:1 leverage at the entry level, despite it being a major currency on which it is not uncommon to offer 200–300 times leverage, and tightened tiered-margin levels for clients, meaning that as their position grew in size, the level of leverage offered dropped dramatically."
McKinney refutes claims that IG or its systems were at fault and says the platform did what it was supposed to do. The problem, he says, lay with the fact that none of IG's liquidity providers were offering prices to the broker, making it unable to hedge out its positions, while the sudden price move activated the platform's circuit breakers.
"Every single one of the liquidity providers turned off and systems are only as good as the underlying liquidity," McKinney says. "We are a principal to trades, but, ultimately, we are just a conduit between clients and our liquidity providers. To reduce risk to clients we deal with a considerable number of major liquidity providers – more than most of our competitors – but this was an unprecedented event, which can be seen clearly from the scale of the impact across the industry."
Nowak and his group, however, are unconvinced this is a sufficient explanation. They point to other customer orders executed at the set levels, while theirs were not, even though stop losses were sitting at very close levels to one another. Questioning IG's technology, they also say they uncovered instances of trades being missed completely or executed out of sequence.
"The system filled some stops in the immediate aftermath of the announcement before the platform stopped trading because of the disappearance of underlying liquidity. Some clients were filled very rapidly before it became clear the market liquidity didn't exist – IG chose to honour those fills, and in fact those fills cost us, as a company, £12 million, partly because our liquidity providers later came back and renegotiated those fills," McKinney says.
The lucky few
IG decided to wear the loss rather than passing it on to "lucky" customers, as doing so would not help the "unlucky" ones, but rather create more pain for more people. The broker adds that its terms and conditions state it works on a best endeavour basis only, and that it can only take on trades if it is able to hedge itself in the open market.
In its terms and conditions, IG also states that clients are liable for unlimited losses and it has the right to suspend accounts at any time, at which point customers have to telephone the broker to try to close out existing positions.
Nowak says he was not notified by IG about his account plunging into the red, and he didn't realise what happened until he received his stop-loss fills and the accompanying bill for £20,000.
"The fill I got from IG is the worst across the retail broker sector," he says, noting other brokers achieved better average levels for their clients. "FXPro filled at 1.1, FXCM at 1.045. FXCM traded almost twice IG's entire amount in the first one minute. How can they claim to be reliable and fast when they stopped trading for ten minutes after the announcement?"
FCA not in touch with broker about incident
McKinney told FX Week the IG platform ceased trading for a few minutes, saying it was not due to a system failure, but rather the complete lack of liquidity in the market and the scope of the Swiss move.
IG charged a spread on aggregated close orders, although McKinney points out the spread was only 5 pips wide rather than the usual 200 points.
"As you would expect, we have analysed this event in detail and I can confirm our internal investigation has found nothing untoward. We would urge affected clients to contact us immediately, so we can assess their situation and reach the right conclusion," he says.
Nowak and dozens of other IG customers have logged a complaint with the UK's Financial Conduct Authority (FCA) and he is awaiting a response. They have also retained legal counsel.
IG says it has not been contacted by the FCA regarding its behaviour on that day, but rather the regulator had been in touch to understand how the industry handled the extreme market event.
The FCA declined to comment on whether it had received a complaint or was investigating IG.
"I understand I am to blame for some of the loss, but to shoulder the losses for failure on IG's part – systems, process, risk management, liquidity providers – I don't accept as fair. I placed an order with high confidence that it would be executed and I paid a fee for that service. If they accepted the trade and thought it was a suitable trade for them to take on, I then expected that order to be handled properly. I don't think IG did that," Nowak concludes.