why do brokers lower their leverage at certain times?

@thabokgosi - 1 year ago - Forex Brokers

My broker is fond of lowering their leverage indiscriminately, thereby increasing margin required to open a trade. They do this every time I see a good trade and want to enter the market. I know most people will says its because there a news event coming etc but my broker does this all the time. Please who else has experienced this and how can I be sure broker are not using this lowering of leverage to prevent traders from making money?

@pierre_r_carosso - 1 year ago

From my eperience, this practice is common with brokers that offer high leverage and who are not well capitalized.

If you are going to use a broker with high leverage I sugest you go for a reputable one with Tier-1 regulation from the FCA UK, or ASIC Australia.

If there is a news event coming up, I think the broker should widen the spread instead of considerably lowering leverage.

I am not an expert here and I this is just my thinking. I would also like to hear from others who are experts in this subject.

@dominykas - 1 year ago

when brokers suspect that volatility is about to spike, they reduce leverage so as to prevent your trading account from going into negative should the market move against your position swiftly.

When leverage is reduced, the broker requires you deposit more margin in order to open a trade, thus shifting much of the risk from themselves to you.

Every broker I have traded with, has periods when they reduce the leverage, how ever some brokers do it more often than others.

Brokers who reduce leverage too frequently may not be as robust (financially/balncesheet wise) as those who dont do so frequently.

For example, today I tried to trade the EUR/USD at the start of the Pre-NewYork session (1 PM) but i couldnt open a position because the broker required more margin so I had to miss out on the trade which would have been profitable.

This is why I always trade with more than one broker, so that when one reduces leverage, I can quickly go to the other broker to open the trade.

@josiah_edem - 1 year ago

My guess is its because of incoming volatility. Markets are really perilous these days because of the Trump tariff wars going on.

@karbin - 1 year ago

Many brokers make a percentage of their revenue from market making. In event there is an increase in market volatility, there is always a chance that the broker could get caught up in the risk if they are not properly hedged.

So, they take proactive measures in order to reduce their risk. Reducing leverage is one such measure.

Plus, if they allow traders to trade on very high leverage, and due to increase in volatility, the client loses so much more than the funds in his/her account, the broker is taking on that risk.

The risk department at a broker are there to analyze such events that may increase the exposure of the broker to the market, and take preventive actions. You could say increasing margin requirements around news events is one such action.

Generally the broker will send you an email with details of the change in margin requirements, like the one in screenshot.

If you notice, the start time & end time of the increase in the margin requirements is around new events.

If you don't want these hassles, stick to a broker that offers you consistent market conditions, no matter what. There are good brokers out there.

@tiny_ox - 1 year ago

I guess it is to prevent you from trading big lot sizes when the broker has seen that the market is too volatile which could cause you to make very large profits or very large losses.