Mitigating Broker Risks with the Liquidity Bridge and Other Technology

Take your risk management strategy to a whole new level.

Going into business is synonymous with taking a risk. It is a part of the game, and it makes it fun. However, if your brokerage is unprepared to meet those risks, you might find yourself out of business.

In time-sensitive and heavily digitalized industries like trading, the crucial component of success is technology. It ensures availability, top performance, and it also helps brokers upgrade their risk management strategy.

Today we will look at some of the main risk categories that affect brokerages and businesses in general. And we will analyze the examples of what technology can do to avoid those risks or minimize their consequences.

Financial risks

The primary goal of any broker is to provide traders with the fastest service and best pricing. If traders don’t feel like they are getting the most from their broker, they are leaving.

So one of the financial risks for brokers is connected with losing clients and decreasing volumes. Another risk is compensation that brokers might be forced to pay out of their own pocket if the system fails.

Here is how technology can help with the financial risks:

  • Distributed and decentralized architecture increases the stability and high speed of the performance. It avoids delays and system freezes. As a result, trade volumes go up.
  • A smart order execution system that provides multiple aggregation modes and access to a pool of Liquidity Providers (LPs) results in better pricing for traders.
  • If traders place large orders, brokers can use Continuous Execution for better end-price results. That way, the big order is split into smaller ones, and it is executed over a period of time instead of wiping out the market depth all at once. In the end, the pricing for the order is better.

Operational risks

The risks that come from within are often a result of unoptimized workflows that lead to unsatisfying performance and missed goals.

Smart automation removes many risks for brokers, especially the risks associated with repetitive, monotonous tasks:

  • To minimize exposure and cut the swap costs, brokers can utilize the automated Volume Consolidation, which will consolidate all open positions across different LPs at the end of each day. The system will eliminate the chance of human error and save hours of time.
  • Updating the swaps is another time-consuming job that should be outsourced to technology.
  • One more way to minimize operational risks is to stay on top of everything happening at the brokerage. To do that, brokers can use internal reports with detailed statistics and data on their performance. The data helps analyze the strong and weak sides of the business, track how new initiatives affect the performance, and notice new trends early.

Economic risks

The industry is very sensitive to news and all kinds of changes.

So if the situation on the market or across the world is unstable, we see a lot of volatility.

And while the periods of high volatility represent an opportunity, they are also risky, and the brokerage has to be prepared for them.

  • The economic calendar can be very handy in times of high volatility but also during normal market conditions. It allows brokers to instantly identify the reason for abnormal trading behaviors and work out an action plan to protect both parties and maximise profits. It works great if paired with customisable pre-configured alerts, which will notify brokers once a certain threshold is reached or a specific activity has taken place.
  • Auto-switching between A-book and B-book helps brokers plan out the scenarios in advance and configure the system to trigger the switch to prevent risks and help both traders and brokers.

Technological risks

Technology can make or break the brokerage, and it is up to brokers to work out a protection system.

Luckily, much of protecting functionality is included in a lot of the broker software.

  • The stability and performance of the software partially depend on its setup. By using solutions with a distributed architecture, brokers can rest easy knowing that their software is resilient to heavy load. It will also scale should the company expand.
  • Another way to ensure seamless performance is configuring a Backup LP in your Liquidity Bridge, so if the primary LP is down, the system will failover, and trading will not be interrupted.

Compliance risks

Regulations vary from country to country. However, basic reporting is required everywhere. The risks associated with failing to comply include fines, license withdrawal, legal pursuit, and bankruptcy.

To avoid issues with regulators, brokers must collect all required data promptly and provide it in the form of reports on due dates.It is recommended to have a reporting solution in place rather than looking for a third-party company to run the reports on your behalf.

The services of external consultants can get very expensive, take a lot of time, and underperform in the end.

Where should you start?

Now that we have talked through the risks and ways to fight them, you can review your own situation within your company.

If you are operating as a broker, you probably already have a risk management strategy in place.

However, it is something that has to be re-evaluated regularly to remain effective.

We recommend starting with a group brainstorming session where you and your key employees can think through which processes or systems require attention.

You might use something as simple as SWOT analysis and run a check on your company as a whole.

Once you have your weaknesses and opportunities outlined, categorize them with the Eisenhower matrix to prioritize them correctly and take action.

As much as we’d like to believe we possess control over the future, what happens tomorrow is a mystery.

Not all risks can be pre-calculated and avoided.

However, we should do our best to spot and mitigate as many potential threats as possible.

If you’ve done the homework and taken all necessary precautions, then there is a high chance that once something unexpected happens, the impact on your brokerage will be significantly lower compared to if you’ve not done anything.

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