For the February Forex Summit we profiled Ed Egar OANDA president and CEO to find out how this retail broker dealt with the tremors Swiss National Bank created when it depegged the Swiss Franc from the Euro. Also featured is an article by Alfonso Esparza, OANDA’s senior currency strategist on the aftershock of the Swiss Bank’s move. There are also highlights of news that matters to traders and upcoming forex events ~ The Editors
OANDA Wins Plaudits for its Swiss Franc Crisis Response
When the Swiss National Bank depegged the Swiss Franc from the Euro, it sent tremors through the forex community and had FX brokers scrambling to respond to traders they serve.
To find out how a retail broker like OANDA deals with crisis—along with the usual level of uncertainty—FCM360 Forex Summit spoke with Ed Eger, OANDA’s president and CE0 since 2013.
He sees OANDA as a technology-led company, whose clients trade with a best-in-breed and award-winning trading engine and, In 2014, OANDA received the Highest Overall Client Satisfaction award by Investment Trends in the US, UK, Singapore and Australia.
Before Eger came to OANDA, he was already a financial pioneer responsible for establishing PayPal as the preferred online payment method for consumers and merchants in the U.S., Canada, and emerging markets across Latin America.
Before PayPal, he served in senior management roles at Citibank, including CEO of its International Cards division, where he managed Citi’s multi-billion dollar consumer credit card business.
His earlier credits include Advanta, Standard Chartered Bank, Wells Fargo Bank, and McKinsey & Company along with a bachelor of arts degree in economics and mathematics from Claremont McKenna College and a master of business administration degree from Harvard Business School.
Q-For the retail trader you focus on, OANDA sounds too good to be true. There are no commissions on trades, no minimum deposits and no account maintenance fees. How do you get paid?
A: Correct, that is exactly our business model and further we do not re-quote or reject trades. OANDA was built on a core value of transparency, and part of that is the cost to our clients – we make money on the spread, as published in all of our rates.
Q-Trade executions in .077 seconds! 77 milliseconds sounds fast, but HFT traders are looking at trade executions in the 7 millisecond range – ten times faster. In this environment, how fast is fast?
A: Actually, OANDA has some of the lowest latency in the industry. We execute 98% of trades within 0.069 seconds or less, which definitely helped serve our clients during the Swiss Franc (CHF) crisis.
Q-OANDA prides itself on bringing traders up-to-the minute news and analysis that impact the FX world. How do you pull this off?
A: We have an award-winning global team of securities analysts and strategists. When we established MarketPulse in 2006 we began publishing insightful research daily with full-time coverage of the world’s largest financial markets. MarketPulse is a forex, commodities, and global indices research, analysis, and news site. Our main goal is to provide timely and informative research on major macroeconomic trends, technical analysis, and worldwide events that impact different asset classes and investors.
Q-When Swiss National Bank (SNB) depegged the Swiss Franc (CHF) from the Euro that once placed the value of the Swiss Franc at 1.20 Euros, it sent shock waves throughout the FX community. OANDA seems to think other central banks will follow suit. What’s in store for FX traders?
A: Uncertainty about central bank actions is very high as the Bank of Japan, China and SNB have all gone off-script in the past three months. However, the size of the move following the SNB shock announcement will probably not be seen in a single trading day, but several events could have higher impact in the mid- to longer term, among them: US rates hikes, UK election results, Bank of England rate hikes, China’s growth, commodity price fluctuations and escalation of the military turmoil around the world.
What’s more, forex market consolidation is already happening and brokers like OANDA that are well capitalized will continue to provide investing opportunities. Some traders only focus on specific pairs and were unaffected by the CHF crosses. I suspect, and I hope, traders will also closely scrutinize their broker’s practices moving forward.
Q-Okay, what about cryptocurrency? Will we be seeing Bitcoin-Euro pairs and Bitcoin-USD pairs any time soon?
A: Cryptocurrency is very interesting and we are watching the trends closely. There is still a lot of extreme volatility around Bitcoin specifically and, while it’s too early to add a Bitcoin pair to our fxTrade platform, and still protect our clients, we are keenly interested in cryptocurrency developments.
Q-We see a lot of trading platforms looking to differentiate themselves. What makes OANDA stand out, especially when it comes to its mobile platform?
A: I believe OANDA stands out in every way. We offer some of the lowest latency in the industry, competitive spreads, price transparency, an array of free educational tools and, via our partnerships, we also offer some of the industry’s top-notch analysis and charting tools. OANDA was one of the first broker’s to launch a mobile platform, and today it offers capabilities and customization unparalleled in the industry.
Q-What did I forget to ask that you want people to know about OANDA?
A: Our business model is one that is always focused on “how do we do right by our clients” which was never more apparent than in the wake of the CHF Crisis. Our clients applauded us, and we also saw the highest number of new customers come to us in January than in any month in our company history.
Swiss Bank Shock
Alfonso Esparza , Senior Currency Strategist, OANDA
Editors note: For an explanation of the run-up and after shock to Swiss National Bank’s decision to no longer peg the Swiss Franc (DHF) to the Euro (EUR), Alfonso Esparza, senior currency strategist with OANDA offers his knowledge and insights.
What is a currency peg?
A currency peg is also called a fixed exchange rate, as the value of one currency is fixed to the value of another. The main goal of a currency peg is to maintain the value within a certain price band. To achieve this, a central bank has to buy or sell its currency to maintain a desired price. The peg can be used to seek stability in times of high volatility. Any country imposing a peg trades that stability for a reduced monetary policy toolkit.
Why did the SNB Peg the EUR/CHF to 1.20?
On September 6, 2011, the Swiss National Bank (SNB) set a minimum exchange rate of 1.20 francs (CHF) per euro (EUR). The main objective was to keep the CHF from appreciating, and the SNB was willing to buy foreign currency in “unlimited” quantities. A year earlier, Brazilian Finance Minister Guido Mantega declared a global currency war was ongoing, as central banks were weakening their currencies to gain a competitive advantage that benefits exporters. At the time, the move from the SNB was billed as protection for the Swiss economy from the ongoing European crisis. Viewed as a safe haven from the economic ills of the eurozone, the CHF was appreciating rapidly, in turn having a negative effect on Swiss exporters. The introduction of the peg caused a depreciation of 9% to the CHF.
What did the SNB say leading up to the shock announcement?
On December 12, 2013, SNB President Thomas Jordan called the peg “absolutely necessary” while being interviewed by CNBC. The results from maintaining the peg were deemed a success as inflation was zero. “It depends on the volatility in markets. There was some volatility in the summer and in the fall of 2013 after the tapering discussion. We expect all central banks will take the possible volatility into account, in the hope that the volatility will be as small as possible,” Jordan said. The SNB introduced negative deposit rates in the last scheduled meeting of 2014, as the danger of a rising franc was part of Jordan’s statement. The SNB again reiterated its commitment to purchasing unlimited quantities of foreign exchange to enforce the EUR/CHF 1.20 price.
Did the Gold Referendum hint at the end of the cap?
The Swiss gold referendum of October 2014 was intended to repatriate and rebuild the SNB’s gold holdings. Had the Swiss voted in favor of it, the SNB would have been obliged to purchase gold to increase its holdings to 20% of foreign reserves from the 8% at the time. To do so would have required the central bank to sell its euro-denominated reserves, thereby rendering its currency peg invalid. It never happened. Swiss voters rejected the proposal by a wide margin and the SNB continued to declare its peg necessary.
What Happened on January 15, 2015?
The SNB announced that it was ending its three-year-old peg to the euro. Claiming the fixed exchange rate was no longer justified, the EUR/CHF was allowed to float freely. In an effort to weaken the CHF, the central bank also cut the interest rate further into negative territory, –0.75%, to make the franc less appealing to investors. The unexpected decision shocked the markets and sheer chaos ensued. Jordan spoke at 7:15 a.m. Eastern time on January 15 after the negative deposit rate announcement went out at 4:30 a.m., when only the Asian markets were in full swing and European pairs didn’t have full liquidity. This low liquidity environment caused a surge in market volatility as supply and demand was constrained by such an unprecedented and unexpected move. The CHF surged after the removal of the peg, as safe-haven demand and euro shorts poured in prior to the European Central Bank’s introduction of a quantitative easing program. The EUR/CHF lost value rapidly as the price plummeted in a matter of minutes as the SNB would not be buying euros and further ECB action would be increasing the supply of the single currency in the market.
Could it happen again?
Never say “never.” This particular black swan event had a smaller winged sibling with the introduction of the peg in 2011. At that time, the CHF depreciated with the announcement of central bank intervention to defend the 1.20 line. All pegs will end in a volatile fashion as it is costly to try to tame the natural supply and demand of the market, and yet central banks around the world continue to join in the fray. The aftermath of the 2008 credit crisis brought about deeper intervention from central banks which in turn shackled volatility. Now, with some central banks preparing to take a step back, the full force of the market will be unleashed until the next brave policymaker attempts to try to tame it once more.
FX In The News
Cisco, IBM, Oracle Head List of Five Cloud Computing Tech Stock Recommendations from Cantor Fitzgerald
Investing.Com – Cantor Fitzgerald analyst Brian White released a note to investors last week reviewing technology stocks that are “anticipated to more aggressively embrace the Cloud over the next twenty four months with more mission critical applications.” The analyst states that “although the Cloud proved very disruptive for many of the large IT vendors over the past couple of years, [he] believe[s] the better managed companies will be able to successfully make this transition.” Link to highlights from the report.
Sky News – Barclays has pledged to more than double its existing financial provision for forex wrongdoing after it took a £500m charge during the course of last year. Barclays had earlier agreed the parameters of a settlement with the UK Financial Conduct Authority (FCA) and the Commodity Futures Trading Commission (CFTC) in the US. Six banks were recently fined $4 billion over forex-rigging. Find out more from Sky News.
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