Risk Management for brokers, episode 1: Slippage

Is there ever a moment when a broker can sit back, relax, and not be on high alert?

Perhaps we are yet to witness this fantastic event.

However, this doesn’t mean that brokers can’t catch a break or at least minimise the overhead associated with constant risk management initiatives, activities, strategies, and plans. 

We are kicking off a series of articles, each dedicated to a common broker risk. With these articles, we’re attempting to shake off the anxiety associated with these risks and help brokers manage them more swiftly and seamlessly than ever. 

Today’s hero is slippage.

What exactly is slippage?

Slippage occurs when the expected trading price and actual execution prices don’t match. So essentially, it is the difference between expectation and reality. 

Why does slippage occur?

There are two main reasons for slippage to show its face:

1. High market volatility
2. Low liquidity 

Rapid and dramatic price movements or limited market depth result in trades being filled with less favourable pricing than market participants originally intended. 

Slippage isn’t always negative (i.e. a worse price than expected), and it can sometimes be positive. The optimistic scenario is less troublesome than negative slippage, which erodes traders’ loyalty and costs brokers their profits. 

Dangers of slippage for brokers

Now, slippage is not the most dangerous thing that can happen to a broker, but it can lead to unfortunate consequences unless tamed in a timely manner.

Here are the main reasons why one shouldn’t ignore the threat of slippage.

• Dissatisfied clients: When prices are executed at a worse price than initially anticipated, this impacts the trader’s trust, which will eventually affect their loyalty. 
• Operational risks: Unexpected price differences lead to losses that can’t always be compensated or accounted for in risk strategies.
• Lower profit margins: Slippage can cause wider spreads or force the broker to compensate the trader for losses, cutting into their profitability. 
• Regulatory conflicts: If there’s one thing regulators hate, it’s the unfair and non-transparent pricing in trade executions. Have too many of those, and you’ll be in for an audit. 

How TFB helps brokers deal with slippages

Tools for Brokers has worked with retail brokerages and hedge funds for over 15 years, helping them grow and expand sustainably. Risk management is one of our core focuses and something that we work on nonstop. 

What can we do with slippage risks?

Trade Processor, our advanced liquidity bridge and margin engine, provides access to over 100 liquidity providers. This ensures advanced access to liquidity and faster order execution, helping prevent or reduce latency-related slippages. 

The built-in risk management and data analytics tools track execution quality in real time and help brokers fine-tune their risk parameters on the go. 

The TFB Toolbox – a single console for all TFB plugins and applications – provides additional capabilities for operational control and ad hoc adjustments. 

Together, these solutions serve as every broker’s personal assistant and protector, minimising negative slippage, boosting client satisfaction, and ensuring coherent risk management practices.