Swiss shock sours FXCM fortunes
Zurich's move to let the franc float freely against the euro exposes the dangers of leveraged trading that left the broker with a US$225m loss
Drew Niv was looking for action. Then action came looking for him.
While in his 30s, Niv built his young brokerage, FXCM, into a money machine by turning the global foreign-exchange market into a playground for day traders.
But by early last year, his hot hand had gone cold. Niv's customers - small-timers who usually lost money while FXCM was busy making it - were looking for thrills elsewhere. Currencies seemed boring.
So from his 50th-floor office just south of Wall Street, Niv, now 41, held out a solution. FXCM could help customers capitalise on minuscule currency moves with a powerful financial tool: leverage. Niv made no bones about the risks. Yes, leverage could amplify profits, he said. But it could also amplify losses. "Leverage is the enemy. The big move, it's what kills you."
Well, the big move just arrived, via Zurich. The Swiss central bank's decision to let the franc float freely against the euro blew a US$225 million hole in FXCM and left Niv, its chief executive, struggling to contain the damage. Turns out the leverage he had warned of months ago magnified his customers' bets by as much as 200-to-1.
FXCM, the largest brokerage of its type, now ranks among the biggest losers from last week's surprise move, which sent the Swiss franc soaring against the euro. Its shares plunged as much as 92 per cent before trading was halted and Niv had grabbed a financial lifeline from Leucadia National Corp.
The Swiss-inflicted damage at banks and investment funds is still being tallied. But FXCM's reversal of fortune has laid bare the risks Niv's firm and its more than 230,000 customers were taking.