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Help: Unusual case: Silver negative balance


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Help: Unusual case: Silver negative balance

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  #11 (permalink)
Singapore
 
 
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Underexposed View Post
you gambled that the price was going to rise if you entered at $15.50.... but you probably decided to "protect" yourself by by entering a Stop-Loss at some number below this point...... right???

No, that's not what happened. I did NOT have any stop loss order. The broker did the transaction on my behalf, without prior instruction, without seeking authorization, and without even informing me afterwards (okay, they "informed" me in the daily statement, which I received the next day).

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  #12 (permalink)
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dragon80 View Post
No, that's not what happened. I did NOT have any stop loss order. The broker did the transaction on my behalf, without prior instruction, without seeking authorization, and without even informing me afterwards (okay, they "informed" me in the daily statement, which I received the next day).

They exited your position and left you with a negative balance. That meant that your account balance hit and exceeded zero. At that point it is beyond a margin call and well within their risk departments discretion.

You put a trade on with no stop, market crashed beyond what your account could with stand and you will have to pay the price.

This isn't that odd of an occurrence. Luckily with my broker they kill any trade that is within $15 of reaching the margin. Again that silver drop was fast and large. But it is your responsibility to ensure that your account is funded and able to survive the position you put on.

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  #13 (permalink)
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dragon80 View Post
Two contracts only.

The initial entry price was ~ $15.5. And when it was liquidated, it was $1 lower, at $14.5. But it was recently rolled over from December contract to March contract at $16.5.

For anyone who doesn't know, silver is 5000 Troy ounces per contract so a 1 dollar move is worth 5 grand per contract. Therefore, "two contracts only" is actually a whopping 10 grand per dollar move which is what the market did and then some against him. On top of this, his account apparently only had $6500 in it to fund such a position. And he did not have a stop loss, therefore his broker stopped him out for him as he is well entitled to do.

This is a risk management nightmare. Seriously, @dragon80, I suggest you develop a risk management plan or never trade again. Because otherwise this will just keep happening over and over....

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  #14 (permalink)
Calgary Alberta/Canada
 
 
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dragon80 View Post
No, that's not what happened. I did NOT have any stop loss order. The broker did the transaction on my behalf, without prior instruction, without seeking authorization, and without even informing me afterwards (okay, they "informed" me in the daily statement, which I received the next day).

Really.... the price of silver is dropping like a stone and you enter into a huge risky play ... which fails and you don't even take the barest measure to protect yourself???? and it is the broker's fault?.........

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  #15 (permalink)
Singapore
 
 
Posts: 6 since Dec 2014
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Actually I have been trading futures contract for four years, although I can't claim that I'm an expert (and this case has clearly proven that I'm not), but I'm not a novice either. I know stop loss (used them regularly, but NOT every time), margin call (have received countless of them in the past four years, and never failed to act), and roll over my contracts in time. I know risk management as well, although in this case, if you don't know the risk, of course you can't manage it.

I have $70k balance in my bank account, liquid, non-time-deposited, ready to use any time, which I deem enough for my trading requirement. Then why the hell didn't I put it all in my broker account? It's easy to ask that because on hindsight, I already told you what happened. What if MF Global happened instead (I know some fellow traders who hasn't got their full dollars despite waiting for years)? Then I suppose the question would become: why did you put all in your broker account?

Moreover, given that I could transfer the fund in a short period of time (internet banking is fast nowadays), I didn't feel that I need to and I believe I was exercising prudence, which unfortunately might have worked against me in this case. Again, for four years, I didn't have any problem with such method. I cover my margin calls easily and timely.

@Underexposed: I didn't enter the contract when the price dropped, and didn't engage in high-risk day trading. In fact, it was purchased some time ago and as I mentioned, it was rolled over from the previous contract period (Dec 2014) to March 2015. And you seemed to miss the point. If due to my OWN action, the contract was underwater and caused me a loss of, say, 30k, it would be totally my fault and there is no way I could lay the blame on the broker. But here, due to my action, I was supposed to be UP 25k, but instead, due to THEIR action, I was down 3.5k instead.

I know some of you are aware of the broker rule (such as Profiler), but I didn't. I was explained lengthily about the margin call, the grace period, and as long as I top up within the period, I should be fine. And I was also explained that I can incur losses MORE than what I initially invest, which, as per my understanding, means that I will be on my own to manage my position and protect myself. Never did they mention that they can try to protect themselves as well, and what happens when in the process of protecting themselves, things go wrong?

Perhaps it's easy to say: you should know better. But judging by some of the responses, I believe not everybody (I think it may even be somewhat close to 50/50) is aware of such rule/policy that the broker can do such thing without authorization. I can be wrong though, maybe it's just me.

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  #16 (permalink)
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dragon80 View Post
Actually I have been trading futures contract for four years, although I can't claim that I'm an expert (and this case has clearly proven that I'm not), but I'm not a novice either. I know stop loss (used them regularly, but NOT every time), margin call (have received countless of them in the past four years, and never failed to act), and roll over my contracts in time. I know risk management as well, although in this case, if you don't know the risk, of course you can't manage it.

I have $70k balance in my bank account, liquid, non-time-deposited, ready to use any time, which I deem enough for my trading requirement. Then why the hell didn't I put it all in my broker account? It's easy to ask that because on hindsight, I already told you what happened. What if MF Global happened instead (I know some fellow traders who hasn't got their full dollars despite waiting for years)? Then I suppose the question would become: why did you put all in your broker account?

Moreover, given that I could transfer the fund in a short period of time (internet banking is fast nowadays), I didn't feel that I need to and I believe I was exercising prudence, which unfortunately might have worked against me in this case. Again, for four years, I didn't have any problem with such method. I cover my margin calls easily and timely.

@Underexposed: I didn't enter the contract when the price dropped, and didn't engage in high-risk day trading. In fact, it was purchased some time ago and as I mentioned, it was rolled over from the previous contract period (Dec 2014) to March 2015. And you seemed to miss the point. If due to my OWN action, the contract was underwater and caused me a loss of, say, 30k, it would be totally my fault and there is no way I could lay the blame on the broker. But here, due to my action, I was supposed to be UP 25k, but instead, due to THEIR action, I was down 3.5k instead.

I know some of you are aware of the broker rule (such as Profiler), but I didn't. I was explained lengthily about the margin call, the grace period, and as long as I top up within the period, I should be fine. And I was also explained that I can incur losses MORE than what I initially invest, which, as per my understanding, means that I will be on my own to manage my position and protect myself. Never did they mention that they can try to protect themselves as well, and what happens when in the process of protecting themselves, things go wrong?

Perhaps it's easy to say: you should know better. But judging by some of the responses, I believe not everybody (I think it may even be somewhat close to 50/50) is aware of such rule/policy that the broker can do such thing without authorization. I can be wrong though, maybe it's just me.

Sorry to hear about the big loss. Sounds like a nightmare. I'm not quite sure what you're looking for, though? You entered a position in a volatile market with an under-capitalized account. It doesn't matter if you were "high-risk" daytrading, or not. Your broker didn't know that you had 70k in liquid funds in another account. All they knew was that silver was tanking, and your position was becoming increasingly more risky. Do you really think your broker was going to let the position that you initiated go 5k/10k/30k underwater before you decided to liquidate?

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  #17 (permalink)
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Transferring money to cover margin is one thing, but here that isn't what happened based on what I read. Your account went to negative balance. Not just insufficient margin. Insufficient margin is covered by the broker, and some brokers give you time to meet the margin call. But here, you went negative equity below zero balance, and of course that means the broker is now funding the losses on your trade, so naturally they are within their rights to liquidate.

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  #18 (permalink)
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I would like to thank those who replied. I already gain some perspective about my situation.

So now, suppose you bought a house for $500k and the bank loaned you 80% of the money. Then suddenly the house price crashed 50%. They immediately sold the house and the next day, you ended up with no house and moreover, the bank told you to cover their loss of 30% (150k).

By the same argument, the bank could say, what are we supposed to do, wait until the price drops further, until you decide to sell it?

Now the question is:
* Are they within their rights to liquidate? I'm beginning to worry whether I should dig up my mortgage agreement among my huge stacks of documents, because until now, I am under the assumption that they can't do that.
* If they can, to what extent are they allowed to do that? (can they just point out to a T&C hidden somewhere, do they need authorization, do they need to specify a grace period, inform the client, etc).

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  #19 (permalink)
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dragon80 View Post
I would like to thank those who replied. I already gain some perspective about my situation.

So now, suppose you bought a house for $500k and the bank loaned you 80% of the money. Then suddenly the house price crashed 50%. They immediately sold the house and the next day, you ended up with no house and moreover, the bank told you to cover their loss of 30% (150k).

By the same argument, the bank could say, what are we supposed to do, wait until the price drops further, until you decide to sell it?

Now the question is:
* Are they within their rights to liquidate? I'm beginning to worry whether I should dig up my mortgage agreement among my huge stacks of documents, because until now, I am under the assumption that they can't do that.
* If they can, to what extent are they allowed to do that? (can they just point out to a T&C hidden somewhere, do they need authorization, do they need to specify a grace period, inform the client, etc).

I see where you are going with the example, but here is where it breaks down: Your collateral.

With a house, you still have control of the full asset, even if its value drops to half.

When you are trading on margin, you are putting up only a very small percentage of collateral, from 1% on a day trade, and 5% on an overnight. SI was trading at 15.5 cents when you took control, that had the following actual value: 5,000 oz X 15.5 cents = $77,500

If you had put up 77.5k there would be no basis for your broker to step in, but when you only put up $3,875 the broker is "trusting" you with temporary control, they are the technical owner holding the collateral.

You will find that your whole agreement with your broker centers on this trust relationship, and your responsibilities to this trust.

Make sense?

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