Negative Balance

A negative balance represents an account balance in which debits exceed credits. This also indicates that the account holder owes some amount of money that must be repaid.

Unfortunately, this issue is not uncommon in the retail brokerage space. Negative balances occur when a position’s losses in an account exceeds the available margin on hand from a given trader.

For example, when a trader places a trade that sharply goes against the chosen direction, an account can incur negative balance.

Such exposure is seen as very risky for brokers.

Though the forex market is the most liquid market in the world, there are however no shortages of unexpected economic, geopolitical or cataclysmic events that can always cause a market disruption and consequently lack of liquidity.

Does Your Broker Have Negative Balance Protection?

Recent years are full of examples. This has occurred during multiple events, and while limited, have resulted in extraordinarily sharp movements over short time frames such as the Swiss National Banking (SNB) Crisis in January 2015.

Negative balances are a point of emphasis in many jurisdictions globally and clients in the European Union (EU) notably are protected from such risks.

As such, brokers are the ones who are exposed to the risks associated with covering the negative balance with a prime broker or a prime of prime.

Many retail brokers have now since adopted negative balance protections. This serves a countermeasure to the risk associated with negative balances on a wider scale.

Furthermore, such mechanisms now include an automated adjustment of the account balance to zero in case it became negative after a stop out.

Traders operating with a broker that offers negative balance protection often cannot lose more than deposited as this protects both the trader and broker from wider losses in times of crisis.