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novice41 · 26-01-2003, 00:24

All traders here trade Forex through brokerages, some big some small. When you sell USD to buy for example EUR or CHF, they are formally supposed to sell your dollars times margin coefficient (e.g. 20, or 50, or 100, or even 200 in some brokerages) and buy corresponding amounts of other currencies. In practice, they are taking the opposite side of each trade and thus neutralize long and short positions in each currency pair within the brokerage. What they have to do then is to sell only the difference between long and short positions times margin coefficient. When the market is steady and short and long positions are roughly equal, the size of their outside transactions is relatively small and their cash reserves can accomodate this. But what if the market plunges? For example, the following article forecasts that Snow is likely to tell at Congressional hearings next week that Treasury will take neutral position on dollar valuation, essentially allowing USD to do whatever it pleases:

http://www.observer.co.uk/business/story/0,6903,882092,00.html

Combined with the already existing trend to sell dollars and current political situation, if this non-intervention policy is announced, the dollar may potentially plunge many hundred pips in a few days. All, and I mean all, traders associated with a brokerage will short USD. Where will your brokerage, especially if it is a small one, get all the dollars to sell on the market and buy the other currencies? Does anyone know what happens in these situations? How do brokerages solve this problem, and do they really solve it, or maybe some of them go bust?

26-01-2003, 00:24	#1 (permalink)
novice41 level 1 Join Date: Jan 2003 Posts: 56 Rep Power: 0	How do brokerages deal with selloffs? All traders here trade Forex through brokerages, some big some small. When you sell USD to buy for example EUR or CHF, they are formally supposed to sell your dollars times margin coefficient (e.g. 20, or 50, or 100, or even 200 in some brokerages) and buy corresponding amounts of other currencies. In practice, they are taking the opposite side of each trade and thus neutralize long and short positions in each currency pair within the brokerage. What they have to do then is to sell only the difference between long and short positions times margin coefficient. When the market is steady and short and long positions are roughly equal, the size of their outside transactions is relatively small and their cash reserves can accomodate this. But what if the market plunges? For example, the following article forecasts that Snow is likely to tell at Congressional hearings next week that Treasury will take neutral position on dollar valuation, essentially allowing USD to do whatever it pleases: http://www.observer.co.uk/business/story/0,6903,882092,00.html Combined with the already existing trend to sell dollars and current political situation, if this non-intervention policy is announced, the dollar may potentially plunge many hundred pips in a few days. All, and I mean all, traders associated with a brokerage will short USD. Where will your brokerage, especially if it is a small one, get all the dollars to sell on the market and buy the other currencies? Does anyone know what happens in these situations? How do brokerages solve this problem, and do they really solve it, or maybe some of them go bust?