For those who have been wishing for more volatility, your wish is about to come true. This week’s Scottish referendum vote will cause widespread carnage across the global markets. In preparation, prime brokers are tightening credit lines, Prime of Prime’s are increasing margin requirements and brokers are about to be left in a state of slight chaos. This is not a news event like NFP where the markets immediately react. This will be two-day gut wrenching rollercoaster filled with rumors and market movements like we haven’t seen in years. The outcome of the vote is still very uncertain, which makes this an even more volatile event.
Regardless of the outcome, brokers need to prepare themselves. Every broker should expect an increase in margin requirements from their liquidity provider. This may or may not happen across the board, but it has already started with several major LP’s. Brokers should make sure they have sufficient funds on place to hedge out any unwanted risk. Additionally, brokers should asses what type of risk they are carrying into the latter part of this week. With extreme market movements expected, risk taking should be reduced. On a final note, brokers need to take a serious look at their own customer’s leverage. Traders will be loading up on “lottery tickets.” Just be sure your brokerage isn’t the one responsible for covering the jackpot.
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Best of luck to everyone this week and don’t forget to wear your seatbelt.