January 2015: The Swiss National Bank Removes the Floor

[Shadow Trader]

In September 2011, the Swiss National Bank introduced a minimum exchange rate of 1.20 francs per euro, committing to defend it by buying foreign currency in unlimited quantities. The aim was to protect the economy from an excessively strong franc during the euro-area debt crisis.

On 15 January 2015, the bank unexpectedly announced the end of that minimum rate and, at the same time, lowered its deposit rate further into negative territory. The franc surged within minutes against most currencies. EUR/CHF fell far below the former floor, and quoted liquidity in the pair largely disappeared for a period.

The consequences were widely reported. Many stop orders were executed well beyond their set levels, some client accounts ended with negative balances, and several retail brokers reported serious losses, with a small number becoming insolvent or needing rescue.

For students of market structure, the episode shows that a floor set by policy is not a law of nature. It lasts only as long as the institution defending it chooses to continue. It also shows why gap risk, broker capitalization and the terms governing negative balances deserve attention in any assessment of execution conditions, however tight spreads look in normal markets.