One of the most common terms utilized by brokers, risk management refers to the practice of identifying potential risks in advance.
Most commonly, this also involves the analysis of risk and the undertaking of precautionary steps to both mitigate and prevent for such risk.
Such efforts are essential for brokers and venues in the finance industry, given the potential for fallout in the face of unforeseen events or crises.
Given a more tightly regulated environment across nearly every asset class, most brokers employ a risk management department tasked with analyzing the data and flow of the broker to mitigate the firm’s exposure to financial markets moves.
Why Risk Management is a Fixture Among Brokers
Traditionally the company is employing a risk management team that is monitoring the exposure of the brokerage and the performance of select clients which it deems risky for the business.
Common financial risks also come in the form of high inflation, volatility across capital markets, recession, bankruptcy, and others.
As a countermeasure to these issues, brokers have looked to minimize and control the exposure of investment to such risks.
In the modern hybrid mode of operation, brokers are sending out the flows from the most profitable clients to liquidity providers and internalize the flows from customers.
This is deemed less risky and are likely to incur losses on their positions.
This in turn allowing the broker to increase its revenue capture. Several software solutions exist to assist brokers to manage risk more efficiently and as of 2018, most connectivity/bridge providers are integrating a risk-management module into their offerings.
This aspect of running a brokerage is also one of the most crucial ones when it comes to employing the right kind of talent.