Protecting your brokerage in the time of turbulence
Author: Baiana Kashaeva
Constant market volatility has become a part of the new normal, as the world can’t seem to catch a break with the global pandemic, economic, and political crises all happening back to back.
And as the uncertainty continues, brokers too continue to look for better and smarter ways to protect their brokerages and the financial well-being of their traders.
This week, we are recapping the tried-and-true risk management methods that are relevant today more than ever.
#1 Service diversification
First and foremost, brokers looking to strengthen their position need to diversify their offerings to traders. Then, should their primary service become less in demand, they have something to fall back on.
Examples of service diversification:
- Weekend trading targeting traders who are busy during standard business hours.
- Trading with unique synthetic instruments that no other broker offers.
- Assisted trading for less-experienced market players using PAMM solutions.
#2 Market diversification
Any market that a broker operates in contains risks. A well-regulated EU market can become financially unbearable should new licensing rules come into play while markets in developing countries may represent legal and political risks.
So, the best way to go forward is to operate in multiple markets and target traders from different locations.
#3 Risk management solutions
Another effective method to manage broker risks is through dedicated risk management solutions that target specific threats.
Technological progress doesn’t stop, and there are always new tools coming out. So if something is bothering you, chances are there is already a solution on the market for it.
A few examples from TFB’s risk management portfolio include:
- The risk of traders’ losses associated with high volatility and low equity can be managed by the StopOut plugin which closes all orders on the account once its equity level reaches a predetermined threshold.
- The Negative balance protection plugin returns the account’s negative balance to zero and withdraws all credit facilities from that account to comply with the regulators.
- Quote timeouts lead to many risks for brokers. The Quotes watcher plugin disables trading for outdated quotes and prevents activities with inactive symbols.
There are two types of risk management: proactive and reactive.
Proactive risk management helps prevent the risks from happening at all. And in such a fast-paced data-heavy industry like finance, where any mistake can lead to devastating consequences, having advanced automation in place can make a huge difference.
- Save time
- Reduce costs
- Avoid human error
- Notify of changes in real-time
With automation, brokers get more done with less effort. Additionally, they stay on top of everything that’s happening with their brokerages and can adapt strategies instantly to reduce risks and make the most out of the current situation.
#5 Reporting and monitoring
Ensuring real-time 24/7 monitoring and reporting is another powerful way to minimize and mitigate any risks the brokerage might encounter.
Often neglected, reporting allows brokers to understand what’s going on in their company, what the trends are, and what the traders are doing. With that information, brokers are better equipped to deal with some of the risks that otherwise would be left unnoticed until it’s too late.
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