Negative Balance Protection

How a balance goes negative

A stop loss is an instruction to close at the next available price, not a guarantee of that price. When the market gaps, at the Monday open or in a shock like the 2015 Swiss franc move, the next available price can be far beyond your stop. On a leveraged position the loss can exceed your entire balance. The broker's stop-out, which closes positions when margin runs low, cannot help either, because it fires at the same unavailable prices.

What the protection does

With negative balance protection the loss is capped at your deposit. The broker writes off the rest. In January 2015 some brokers pursued clients for hundreds of thousands of dollars; others, voluntarily or by regulation, wrote the debts off. After that event ESMA, the FCA and ASIC made the protection mandatory for retail clients.

Where you get it

Does it matter to you

If you trade small sizes with modest leverage and no exotic pairs, a negative balance is unlikely. If you use high leverage, hold over weekends or trade around news, it is a real possibility and the protection is worth choosing a regulated entity for. A voluntary policy from an offshore broker is better than nothing, but a policy can be withdrawn; a regulatory requirement cannot.

Key takeaways

• Gaps can push a leveraged account below zero regardless of stops.
• Negative balance protection caps the loss at your deposit.
• It is mandatory under FCA, ESMA and ASIC rules and optional offshore.