What is Negative Balance Protection?
Negative balance protection is a protective-mechanism which means an online trader cannot lose more money than is currently in their trading account (with that broker). To be clear – they will never owe a broker money if a trade goes horribly against them.
Thankfully, most CFD and FX brokers in the UK, Europe, the Middle East and Australia offer negative balance protection. This protection should put retail traders at ease, knowing that their trading activity will not end in debt.
Why Was Negative Balance Protection Introduced?
The whole concept came about after the Swiss Franc fiasco in 2011.
Well, on January 15th, 2011 the Swiss National Bank unexpectedly stopped pegging its currency against the EUR (at 1.20 francs per EUR). This created a momentum price shift in the EUR/CHF currency pair, with the franc rapidly strengthening against the euro.
Many traders were shorting (selling) the franc at that time and this huge market gap resulted in all of them having huge negative balances to their broker, i.e. they owed their broker millions of $$$$! In basic terms, they lost more than they had on their account.
Brokers That Offer Negative Balance Protection:
Who are they?
Segregated Bank Accounts?
ASX Stock Commission
Australia 200 spread
Wall St 30 spread
0.07% with $5 min.
0.9pts - FIXED
1pt - FIXED
0.6 pips - FIXED
No ASX stocks
From 0.5 pips
Fixed & Variable
cTrader or MT4/ MT5
How Does It Work?
Say you have some open positions and then the market moves horribly against you. One minute you have an account balance of $10,000 and the next, it is entirely wiped out due to the market gap. In this example, your account balance is now showing a balance of minus – $2,500.
However, if you trade with a broker that offers negative balance protection, you will never owe them more money than is on your account. Using the example above, the broker would wipe the -$2,500 of your account and you would now have a balance of $0.
Balance protection is particularly important for new traders. This is because they may be unaware of how fast-moving markets can result in price slippage.