Margin Call and Stop Out, how not to be left without a deposit at the most inopportune moment

This story happened on December 30, 2015. At this pleasant New Year’s time, a time when miracles happen and you want to make new magical desires, a private trader named Denis Gromov also hoped for a miracle. Otherwise, it is difficult to explain the fact that in just 4.5 hours he managed with a deposit of 5.6 million rubles to crank more than 5 thousand transactions in currency pairs to 42 billion rubles. Later, the 38-year-old trader himself will tell that he did not understand what happened. After all, the dollar was growing and making money on the exchange – this was the best option in terms of margin costs. The result turned out to be sad: having completely lost the deposit, he was left to the broker another 9.5 million rubles.

Trading was conducted on a specific asset USDRUB_TOM, the rate at which the Central Bank set the next day (TOM – tomorrow). Gromov noted that in comparison with USDRUB_TOD (today), the American currency is a bit more expensive. In 38 minutes, he conducted more than 2.5 thousand transactions, buying American currency with today’s calculation and selling it with tomorrow’s calculation. The deposit, as it seemed to Gromov, was not enough, because he took advantage of the broker’s leverage. The general position on the purchase/sale of the asset was within the guarantee coverage (the amount of the deposit blocked by the exchange as a pledge for operations), but the turnover already amounted to about 23.7 billion rubles by that time.

At that moment, the manager of the broker called him and informed about the occurrence of the so-called margin stake and suggested: “to reduce the amount of borrowed funds by performing reverse transactions.” The trader’s mistake turned out to be simple: the cost of arbitrage trading was not taken into account (operations with the same assets at the same time in order to profit on the price difference). Any leverage allows you to increase the volume of the transaction, for which, when transferring to the next day, a fee is charged for transferring an open position to the next day (swap). Transactions on USDRUB _TOD were carried out on December 31, while transactions on USDRUB_TOM – only January 11th. For all these days off, the trader should have been charged with a swap, which turned out to be more than the trader’s deposit. This is precisely what the broker’s manager told the unlucky trader who had only to close open deals at a loss. Attempts to solve the problem through the courts did not lead to success, but this story became a vivid example of what the lack of understanding of terms such as “margin trading”, “margin call” and “swap” can lead to.

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