Risk management for brokerages 101

Author: Albina Zhdanova

Years go by, and seasons change. Yet, one thing remains the importance of risk management for brokers.

And today, we’d like to address this topic again and go through the basic risk management precautions some of you might have already heard about, but not all of us follow them as religiously as we should.

MetaTrader risk management tips

MetaTrader (or any other platform you work with) has to be protected and secure at all times.

MetaTrader 4

In our experience with MetaTrader administration and troubleshooting, there are several very useful indicators to monitor that can help to detect issues in advance. MT4 was developed in 2005 and will soon turn 20, and its performance and capacity are not up to, for example, MT5 in terms of performance. As a result, the system may be unstable under high load, so this needs to be monitored closely.

What are the key indicators that we can monitor?

• The size of the orders.dat database
• The size of the daily.dat database

If the first one reaches 3.5+ GB, you'll probably face server freezes during active trading or MT4 optimisation times (especially if you have plugins on the server). If the second parameter reaches 5+ GB, there is a potential server vulnerability and if several managers request history reports for a considerable number of accounts, the server might simply stop responding.

Another thing that can help you to predict server performance problems is the "MaxMemoryBlock," which you can track in the MT4 server logs. If it falls below 500 MB, the server is about to stop operating normally.

The great news is that the TFB team can easily monitor all these indicators! Reach out to us if you’d like to learn more.

Here are the recommendations from our technical team that you can follow to avoid freezes caused by the issues we’ve just discussed:

• Track the size of your orders.dat. Remove old accounts and deals, and archive the biggest of them if possible.
• Limit the ability to request history reports to specific managers only.
• Remove plugins that are not actively used.
• Configure a proper backup environment to roll over to if something happens.

Tip: We have prepared an entire tools package for MT4 optimisation. Each solution in the package helps target a specific issue with the server and allows brokers to maintain an excellent level of performance. For details, check out the separate blog post where we outline everything that goes into the MT4 optimisation package.

MetaTrader 5

MetaTrader 5 (MT5) is much more modern and stable, so it is not affected by all the parameters we mentioned for MT4.

Still, we have noticed that sometimes MT5 can face memory leaks, so it's essential to:

• Monitor CPU and RAM consumption by each component of MT5.
• Design the server and network architecture properly.
• Configure an advanced backup environment.

Proactive data monitoring and reporting

The monitoring and reporting do not have to stop with your servers.

Access to data is one of the few advantages we have in these trying times. Often, brokers don’t need additional software or a data analyst to run reports. Trade Processor, the TFB’s liquidity bridge, offers basic reporting in its console. So what is required from clients is to simply be curious and look at what’s there.

Data from basic daily operations can forecast trends, notify us about potential risks and inefficiencies, and pinpoint opportunities. So many of our clients come to us with issues that could have been avoided with timely data monitoring and reporting.

TFB Monitoring System

If you require more advanced monitoring but are not sure where to start, try the TFB Monitoring System.

The system controls the servers’ state to ensure the stability of the environment and sends notifications on specific events. Overall, it monitors over 50 different indicators, and the dedicated technical team at TFB is tracking operational activity 24/7 to respond as soon as possible should something abnormal happen.

You can read more about our monitoring system in this blog post.

Risk management empowered by the liquidity bridge

Every element of a broker’s environment can and should play a role in risk management. And the liquidity bridge, being the heart of the brokerage, is no different.

Depending on the bridge solution you have, your options with it will be different. Here is what TFB clients using Trade Processor can utilise besides the reporting and monitoring that we’ve already covered:

• Backup LP. If something happens to your primary Liquidity Provider and order execution is at risk, you can activate the Backup LP functionality. In that case, the system will switch to the backup option and execute the order with the secondary LP. Once the primary LP is back online, the system will revert back to it.
• Configuration backup. Brokers can schedule configuration backups to a remote server to be able to restore the bridge quickly if a disaster destroys the primary server. The backup allows us to return to normal operations as soon as possible and minimise the damage to the brokerage and traders.
• Multiple execution possibilities. In total, Trade Processor supports six modes of aggregation, meaning that brokers can pick the format they need to meet the specific demands of the client and ensure the best pricing.
• Volume Consolidation that automatically consolidates all open positions across all LPs at the end of the day, therefore eliminating the risk of swap costs and exposure going out of control.

Multiplatform business model

The year 2022 has shown many brokers how dangerous it can be to rely on a single trading platform in your business operations.

You would have thought that the financial sector would be the one to remember about the eggs and the basket, but here we are!

So, as you plan your risk management strategy for 2023 and onwards, consider working with several trading platforms to ensure you have options in case something happens. As a bonus, because different platforms work differently, you can use the multiplatform approach as a competitive advantage and offer your client options. Everyone talks about a custom approach to every client, and working with multiple platforms is a great way to put that into practice.

Final thoughts on risk management for brokers

You are lucky if nothing has ever happened to your servers. However, most brokers face server and availability issues for 30 minutes to 2 hours a year. In theory, a couple of hours might not sound that bad on an annual scale. In reality, it’s a tremendous stress with unpredictable consequences for the business.

If you’ve implemented all the risk management measures, but something terrible still happens, make sure to localise the issue immediately, solve it (at least temporarily), investigate the root cause thoroughly, and, finally, add new guidelines and measures to avoid this in the future.