There are many different techniques for running a book of business, and risk management has evolved drastically over the years. This largest impact an experienced risk management team can have for a broker is converting from an agency (STP) model to a hybrid principal model.
An effective hybrid principal model is not easy to implement. The shift requires an extremely experienced risk management team with shrewd attention to detail. Every broker is different, but the magic number tends to hover around 70% B-book, 20% A book, and 10% C book. This is not a ‘set and forget’ formula since changes in market conditions affect traders differently. Also, client trading behaviors evolve and change over time, requiring a constant evaluation of all books. A principal hybrid set up has to be a fluid model.
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Another critical component to the shift in risk management is technology. Traders should not feel a difference in execution based on their corresponding book. Brokers should have the ability to shift traders amongst different books without server restarts or forcing the traders onto a new symbol set. The model needs to be dynamic and changes need to be made on the fly. It doesn’t matter how good a risk management team is if they are using outdated tools.
Almost all of the large players in the industry run a hybrid model, and it is scalable across any broker of any size. STP brokers don’t always realize what is being left on the table. Sometimes a quick analysis of the customer base can go a long way. No matter the size of the broker, it is a worthwhile exercise to look at client profitability as a ratio to volume. There are resources available to help with this review.