Unexpected loss on trade

In mid-2021, Jack opened a contract for difference (known as a CFD) on the price of gold paired to USD. Jack had been monitoring the gold market in the lead up to his trade. When he opened the trade, he thought the market was barely volatile and he expected to make a USD10,000 profit.

The trade opened at $1,715. Jack set the ‘take profit’ price at $1,700 and the ‘stop loss’ price at $1,723.

Unfortunately for Jack, the market was volatile and moved unfavourably when Jack opened his trade. The broker closed the trade after less than a minute. Jack’s loss was $4,600, which caused his trading account to become overdrawn.

The broker said a stop out was triggered when Jack reached a 50% margin. The broker’s trading platform automatically filled Jack’s order with the best available price, which was $1,721.

A ‘stop out’ is different to a ‘stop loss’ price. The purpose of both is to limit a trader’s loss, but they are triggered by different events. The former is triggered when the trader’s margin falls below a specified level (in this case, 50%). The latter is triggered when the price reaches a certain level (in this case, $1,723).

Jack complained to FSCL. He did not accept the broker’s explanation of why the trade had closed or the closing price.

 

Dispute

Jack believed the broker had tampered with his trade. The broker stopped the trade just as the price went in his favour. The broker also did not let the trade continue until it reached the stop loss price Jack had set. If the broker had allowed the trade to continue, Jack would not have suffered a loss because the market moved in his favour.

The broker said it had not done anything wrong. It believed it had given Jack a reasonable explanation of why the trade closed and the closing price. The broker had also written off the overdrawn balance of Jack’s trading account as a goodwill gesture.

 

Review

We concluded that the broker was not responsible for Jack’s loss.

The broker was entitled, under its terms and conditions, to close Jack’s trade when the trade reached a 50% margin. The terms and conditions provided that the broker had the right to close a trade if the margin held fell below its requirements. Jack did not dispute the broker’s calculation of the margin or that the 50% threshold had been reached.

 

Outcome

We concluded that Jack should discontinue his complaint.

Jack withdrew his complaint from our process but did not agree with our findings. Jack said he was considering court proceedings against the broker. 

 

Insights for consumers

Consumers that trade in derivatives should make sure they understand the risks. This case shows that consumers can suffer large losses and that these can happen quickly. Losses can exceed the consumer’s trading account balance, particularly when market conditions are volatile.

The Financial Markets Authority (FMA) - Te Mana Tātai Hokohoko – say on their website that “derivatives trading is very high risk, even for experienced investors” and that they are not “a suitable ‘investment’ for most consumers”.

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