Current market carnage - anyone selling or buying?

gadgetmind

Which all works well until it doesn't.

https://uk.finance.yahoo.com/news/370-investors-lost-18m-minutes-090123643.html

"The group of 370 IG customers, who wish not to be named, blame the broker’s systems for failing to allow them to “close” or settle their positions before losses grew too large. In the worst case one investor, who had staked less than £10,000, now faces losses of £250,000."

El_Selb

Was anyone else worried, or take any heed of RBS' comments earlier in the week?

"Royal Bank of Scotland (RBS) has told investors to run for cover with 2016 set to be a 'cataclysmic' year for markets... the investment bank said: ‘Sell everything except high quality bonds. This is about return of capital, not return on capital. In a crowded hall the exit doors are small.’ "

tg99

gadgetmind wrote: »

Which all works well until it doesn't.

https://uk.finance.yahoo.com/news/370-investors-lost-18m-minutes-090123643.html

"The group of 370 IG customers, who wish not to be named, blame the broker’s systems for failing to allow them to “close” or settle their positions before losses grew too large. In the worst case one investor, who had staked less than £10,000, now faces losses of £250,000."

These clients were speculating on currency in a leveraged manner, completely different to my strategy above where as explained the risks of being closed out can be covered. A lot of the FX market currency traders and banks had similar issues in settling trades immediately after the move.

bowlhead99

gadgetmind wrote: »

Which all works well until it doesn't.

https://uk.finance.yahoo.com/news/370-investors-lost-18m-minutes-090123643.html

But that situation related to insufficient liquidity to keep up with demand of the accountholders to sell out of their holdings.

tg99 was discussing how he is able to take his long term investment position without risk of being stopped out periodically for potentially large losses on a spike. He can post margin and add more money to his account if something goes awry. That is not the same as the 370 investors wishing they had been stopped out because they couldn't afford the loss or didn't understand how far the market could move against them.

As long as he is using the account facilities to mirror a position he could have alternatively afforded to take in the real world, and only using leverage because it is cheaper rather than because he couldn't actually afford the gross position for real, he probably isn't "gambling". Well I suppose investment and speculation and gambling are related terms. But what I mean is, he is finding an appropriate way of taking a position he'd like to take, rather than trying to take on a position he can't afford.

InvestInPoker

El_Selb wrote: »

Was anyone else worried, or take any heed of RBS' comments earlier in the week?

Anybody who listens to anything RBS says needs their head examined.

tg99

bowlhead99 wrote: »

But that situation related to insufficient liquidity to keep up with demand of the accountholders to sell out of their holdings.

tg99 was discussing how he is able to take his long term investment position without risk of being stopped out periodically for potentially large losses on a spike. He can post margin and add more money to his account if something goes awry. That is not the same as the 370 investors wishing they had been stopped out because they couldn't afford the loss or didn't understand how far the market could move against them.

As long as he is using the account facilities to mirror a position he could have alternatively afforded to take in the real world, and only using leverage because it is cheaper rather than because he couldn't actually afford the gross position for real, he probably isn't "gambling". Well I suppose investment and speculation and gambling are related terms. But what I mean is, he is finding an appropriate way of taking a position he'd like to take, rather than trying to take on a position he can't afford.

Yep...and inability to exit positions in a huge market shock (as was the case with the c40% move in CHF) can also be an issue in your mainstream markets and stockbrokers. If we get another 87 style crash, you could find in the ensuing panic that some of the brokers websites are down and unable to get through on the phone so will not be able to exit (or buy) a position (albeit it might not be particularly wise to sell after a one day 25% fall if you are following a long term investment strategy!). I recall that Hargreaves even had issues just trying to cope with all the people looking to sell their newly issued Riyal Mail shares and some customers were unable to deal online or get through over the phone. Liquidity might also dry up in the ETF market in a market shock, mutual funds where there is a liquidity mismatch with how often they deal etc.

DiggerUK

InvestInPoker wrote: »

Anybody who listens to anything RBS says needs their head examined.

The small print says balance the green shoots of recovery, against the red flags flying..._

http://www.dailymail.co.uk/debate/article-3398610/ALEX-BRUMMER-RBS-warns-clients-sell-really-brink-financial-meltdown.html#ixzz3xDQEoV3j


http://www.theguardian.com/business/2016/jan/12/rbs-forecast-doom-global-economy-2016

ColdIron

El_Selb wrote: »

Was anyone else worried, or take any heed of RBS' comments earlier in the week?

Not if you have any sense, Andrew Roberts has form on this

http://blogs.spectator.co.uk/2016/01/the-author-of-the-rbs-sell-everything-note-has-been-predicting-disaster-for-the-last-five-years/

grey_gym_sock

tg99 wrote: »

Yep understand where you are coming from as these are exactly the risks I had to make sure I was covering before using spread betting for certain long-term positions. For me, I have the facilities to enable me to remove the close out risk as depending on which of my accounts I use I have variety of measures / facilties in place:

- Deposit waiver, which in combination with 95% collateral value applied to some physical shares I hold on IG stockbroking service (US ones given only 0.3% fx transaction fee vs 1-1.5% for typical broker), means I never have to put down an initial deposit for any of my positions as the waiver amount is pretty large especially since initial deposit requirements tend to be quite small for liquid instruments like US futures etc. However, the waiver and collateral value only cover initial deposit requirements and NOT any losses resulting from the position.

- Credit limit: this covers losses on open positions up to a certain level, only if they exceed this level would they contact you to ask you to post margin. So say you had a credit limit of £20k and had no other positions on then instead of say investing £15k in a US index tracker fund you could take the same exposure via a spread bet and are thus not at risk of being closed out as even if S&P fell to zero you would only be down £15k.

- Next day margin: a next day margin facility so have to 3pm the following day to post margin if exceed credit limit on the previous day. So say only had £5k credit limit and the S&P fell 50% in a single day then you would then be down £7.5k so would be requested to pay margin of £2.5k by 3pm the following day. Therefore would need to make sure have the funds backing the position in a bank account (so can use debit card to make instant payment or at anytime pre-3pm following day) or a savings account offered by a bank with faster payments where you also have a current account (i.e. so say had Tesco internet saver then could transfer the money straight into Tesco current account and then make card payment). (With most other savings accounts you don't typically receive any process withdrawal requests until a day or two later.)

The caveat to this next day margin facility is they can close out your position before 3pm next day if your losses continue to accumulate and go below your liquidation level which is typically substantially below your credit limit (e.g. with credit limit of £20k your liquidation level might be £100k).

so part of what you're saying is that you need to limit your maximum exposure (e.g. £15,000 if your bet is the equivalent of investing £15,000 in the S&P500) to no more than your liquidation level, or there is some risk of being closed out.

you have clearly investigated this thoroughly. it still seems to me like an unnecessary extra layer of complicated risks, which i'd rather steer clear of. and for long-term positions, the extra risks are also long-term; in a way, i'd be happier using derivatives where there is a short-term reason to do so (e.g. hedging out a large exposure to a share when you can't sell your real shares yet).

tg99

grey_gym_sock wrote: »

so part of what you're saying is that you need to limit your maximum exposure (e.g. £15,000 if your bet is the equivalent of investing £15,000 in the S&P500) to no more than your liquidation level, or there is some risk of being closed out.

you have clearly investigated this thoroughly. it still seems to me like an unnecessary extra layer of complicated risks, which i'd rather steer clear of. and for long-term positions, the extra risks are also long-term; in a way, i'd be happier using derivatives where there is a short-term reason to do so (e.g. hedging out a large exposure to a share when you can't sell your real shares yet).

Yep, which is why I make sure I eliminate these risks by keeping within my appropriate limits as otherwise could easily get closed out in a flash crash type price movement etc.

For me personally, I am comfortable with the strategy given the other advantages that come with it in terms of saving on dividend tax and cgt (as I have generally been using up my full cgt allowance), and my experience of derivatives over years of my spread betting accounts and in the day job. I only do it for certain positions where the potential annual cost saving makes sense (e.g. If 2% pa saving I would argue that is a decent return to compensate for any risks involved when you consider it is half the approx equity risk premium and probably equivalent to the different between investing in equities and credit over the long term......but that is just me and others with different levels of risk tolerance might disagree) and run spreadsheets alongside taking account all the roll costs, funding costs etc to ensure there is a suitably material benefit to taking the exposure in derivative form.

It is definitely useful imo for shorter term uses such as when doing asset transfers, typical example being switching between pension providers when you have to sell the funds at the incumbent and cannot reinvest until a couple of months later when the cash has been transferred to the new provider. In my view, the costs and any risk with maintaining exposure for those couple of months by taking out similar allocation via derivatives more than compensates for the bigger risk of being out of the market for two months and thus completely mismatched with your long term investment strategy. I have seen this happen before and markets have gone up 5-10% which is very material if your long term investment strategy is say 80% equities. Most DB pension funds will seek to eliminate any out of market exposure - e.g. when changing investment manager - in a similar way by using derivatives.