Negative balance protection was put in place by the FCA to stop reatil trading accounts going into negative equity. It was introduced after the CHF cap removal debacle in 2015. Because the CHF moved with such speed and to such a degree, traders and brokers did not have a chance to close off leverage positions. This resulted in clients owing their brokers money as they have lost more than was on deposit, in some cases, hundreds of thousands, in a few, it was millions.. Since then spread betting brokers and CFD trading platforms have had to provide their customers with a guarantee that they will not end up owning them money.
What is negative balance protection?
Negative balance protection means that the balance of your trading account cannot go below zero. It stopped trading platforms coming after you as a client if you overtrade, lose money and end up with a cash deficit on your account, because it is technically no longer possible for retail clients to do so. Taking IG as an example, with IG negative balance protection, if you are a retail trader, you cannot lose more money than is on your account.
Why negative balance protection is a good thing?
On the surface, this seems like a good thing. The very nature of options, CFDs and spread betting, which allows private clients to take leveraged short-term bets on stocks and other asset classes (like forex trading) could, in theory, result in infinite losses.
What I mean is that if you are long you can only lose to zero. But, if you are short a stock, commodity or currency the price can go up indefinitely. Of course, that’s what initial and variation margin is there to protect against. Plus, positions are generally closed out via a margin call before they get into negative equity.
However, in some cases, such as the CHF cap removal or a significant acquisition bid being placed on a stock, prices can move a huge amount and highly leveraged positions can wipe an account out instantly. In some cases spread betting clients are trading with a gross exposure of more than their net worth so there is a clear and obvious financial danger to the client and broker.
Clearly then, negative balance protection is a good thing for customers. It essentially stops them having to pay up on a massive loss. The broker would take the hit, presumably get a nice bit of PR in the process and win some clients from competitors as they are seen as this month’s nice spread betting broker.
Can negative balance protection be a bad thing?
But it’s also a bad thing.
Spread betting is an investment tool and can be used effectively as part of an overall investment strategy. But in some cases (or most) it’s used by crazy punters trying to beat the market and make money quickly without understanding the risks.
By putting negative balance protection in place, it’s going to make inexperienced traders (who now have a safety net) even more prone to taking unnecessary risks under the impression that they can make easy money.
Also, with negative balance protection come increased margin rates. These increases may encourage retail traders who are not suitable for it, to upgrade to professional trading accounts where they can get lower margin rates but in turn lose some of the protection from the FCA, including negative balance protection.
Which brokers offer negative balance protection?
All these trading platforms are regulated by the FCA and therefore obliged to offer negative balance protection for retail traders. Click the below links to read our reviews and ratings of each broker.
Please note that if you opt to upgrade to a professional account, you may no longer be eligible for negative balance protection.
Richard is the founder of the Good Money Guide (formerly Good Broker Guide), one of the original investment comparison sites established in 2015. With a career spanning two decades as a broker, he brings extensive expertise and knowledge to the financial landscape.
Having worked as a broker at Investors Intelligence and a multi-asset derivatives broker at MF Global (Man Financial), Richard has acquired substantial experience in the industry. His career began as a private client stockbroker at Walker Crips and Phillip Securities (now King and Shaxson), following internships on the NYMEX oil trading floor in New York and London IPE in 2001 and 2000.
Richard’s contributions and expertise have been recognized by respected publications such as BusinessInsider, Yahoo Finance, BusinessNews.org.uk, Master Investor, Wealth Briefing, iNews, and The FT, among many others.
Under Richard’s leadership, the Good Money Guide has evolved into a valuable destination for comprehensive information and expert guidance, specialising in trading, investment, and currency exchange. His commitment to delivering high-quality insights has solidified the Good Money Guide’s standing as a well-respected resource for both customers and industry colleagues.
