Forex Industry Tech Well Prepared for Brexit Vote, Market Risks Recede

The foreign exchange industry looks rather well prepared for risks surrounding the incoming UK referendum.

The final efforts of the Bremain vs. Brexit campaigns are upon us and the referendum on whether the United Kingdom will remain in the European Union is just three full days away. Monday morning saw markets vote with confidence that the British populace will vote to remain.

The British pound and global stocks have been rallying in tandem with pretty much all assets that are considered risky in today’s trading. Meanwhile, the mainstream media has continued to beat the drums about the risks around Brexit.

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The betting odds shifted dramatically in recent days after the shooting of British MP Jo Cox on Thursday. Today the financial markets are beginning to work their magic and are in the process of discounting the prospective outcome from the referendum into the price of various assets.

Stocks and oil are rallying in tandem with the British currency and industry insiders sound pretty confident about the prospects outcome from a Brexit referendum. Finance Magnates reporters have spoken to key executives at tech companies oneZero and Gold-i about the technological challenges associated with the vote.

SNB vs. Brexit

Speaking to Finance Magnates about the differences between this Thursday’s referendum and the Swiss National Bank calamity in January 2015, the CEO of oneZero Andrew Ralich said: “Brexit, SNB, or any other news event or major source of volatility have similar impacts on technology providers from an infrastructure standpoint.”

“It is our job to have systems in place that will scale to meet the short bursts of extreme demand in terms of bandwidth, latency and overall reliability. Events such as Brexit, which can be predicted in advance, do tend to highlight where technology providers can be flexible in terms of margin configuration, and other protective measures.”

Events such as Brexit, which can be predicted in advance, highlight where technology providers can be flexible

The more predictable aspect of the incoming referendum is clearly likely to result in brokers being much more prepared to the outcome from the vote. The fact that markets will be open and the flow of results region by region will be gradually flowing in, is also quite different from the black swan of the SNB event last year.

The CEO of Gold-i Tom Higgins elaborated: “Brexit (or Bremain if we stay) is very different from the SNB as it is 100 per cent predicted. We know when it will be volatile and we know there will be a large change in GBPUSD on the 24th when the results come out, but we don’t know which way the price will go.”

Tech Providers at Work Closely with Clients

Forex and CFDs brokerages and their technology providers have had a lot of time to prepare for the vote. Both Gold-i and oneZero are prepared to meet the increasing order flow and thin liquidity conditions in the coming days.
“Leading up to Brexit, the ability to dynamically increase margin on a per-symbol basis has been the primary request coming from our clients, which we have been able to meet both for our brokers using MT4 and brokers using our Margin engine for B2B business,” Mr Ralich explained.

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Indeed, in the past couple of weeks a huge number of brokerages have started to change their margin requirements on various pairs, commodities and indices. With the broad risk nature of the event, the outcome is affecting multi-asset brokerages across several asset classes.

“We have worked with our clients to make sure they have disaster recovery solutions in place, and have the correct power of server and large-enough Internet connections to cope with the anticipated demand,” Mr Higgins elaborated.

But not all of the companies in the industry are fully insulated from prospective surprises.

Higgins commented on some policies employed by a number of brokerages: “I do worry about brokers who offer a guarantee that a client account cannot go negative as clients could game this with huge bets which pay much more than they could lose, but this is not a technology issue, but a business issue.”

Disrupted Liquidity Main Challenge to Brokerages

Higgins elaborated on the main challenge around the referendum on Thursday: “Liquidity providers are continually increasing the quote rate that they sent to brokers, which stress their trading systems. If the broker systems are already running at, say, 50 per cent of capacity and a sudden event triggers a 10 times increase in rates, then the broker’s systems will be flooded and will slow-down.”

Liquidity providers are continually increasing the quote rate that they sent to brokers, which stress their trading systems

“Gold-i has developed a dynamic throttling system to assist with this but a very heavily-loaded MT4 system will struggle. MT5 should greatly improve this situation as it is much more scalable and high performance and allows growth via clustering,” he explained.

Commenting on the prospective outbursts of volatility and their effect on the systems that brokerages are using, Mr Ralich emphasized the liquidity challenges: “Anytime liquidity can potentially dry up due to extreme uncertainty or surprise, such as what was saw during the SNB event. Should that happen, the underpinnings our entire industry are threatened.”

Anytime liquidity can potentially dry up due to extreme uncertainty or surprise

“When the market is so unpredictable that market makers pull their quotes entirely, liquidity pools dry up and the ability to execute disappears altogether, we therefore face risks to the industry as a whole that no amount of technology of infrastructure can build around,” he elaborated on the biggest prospective risk.

“From a technology and infrastructure standpoint, we are used to massive bursts of activity in short periods of time. We see this every NFP, and are also able to tune our systems around the behavior we see the first Friday of every month, and during other news events,” Ralich concluded.

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