Generally, if an FX broker decides to hedge a customers' position, it automatically hedges the customer's trade to Liquidity Providers when the trade occurs in the spot market. Let's say, the customer buys EUR/USD, the broker also buys EUR/USD in the LP as quickly as possible. When the customer closes the position, the broker sells EUR/USD in the LP. By doing that, the broker becomes safe in terms of the price movements.
But there's a problem here. When a gap occurs, the customer gets stopped out with a negative balance and the same is true for the broker's position in the Liquidity Provider, the broker also loses money in the Liquidity Provider more than it should loose because of the price gap. The regulations do not allow the broker to request the customer to neutralize the negative balance.
Let's say the customer lost all his money 100k and his balance is -5k because of the price gap but the broker can not request the -5k, so the income is 100k. Similarly, the broker lost $105k in the LP, the outcome is 105k, which causes 100k - 105k = -5k loss totally. So, the hedging operation caused a loss in this scenario.
Are there alternative ways to do this kind of hedging using some derivative instruments or different strategies?
Do you think there can be a solution by using FX options since it gives a right, not the obligation?