The Importance of Risk Management and Compliance

How do risk management services of a liquidity provider help maximise profitability of client flow?

Risk and the management of it are hugely important when it comes to CFD trading and all other types of financial investment.

It pays to understand the role of risk in trading and how you can manage it using the latest tools. Indeed, any business that can master risk management stands a better chance of increasing their client flow and, in turn, their profits.

The Operational Importance of Risk Management

Risk is a core concept in trading. Without risk, you can’t think about returns. They’re two sides of the same coin. To make a profit, you have to accept the risks associated with an investment.

Wrapped up with the concepts of risk and return is volatility. This refers to the amount of movement away from an expected norm (standard deviation). 

For example, Asset A might have an average return of 10% over a five-year period. It may be a low risk, low volatility asset with fluctuations of one standard deviation from the norm 80% of the time.

In other words, its movements are always close to the average. Asset B may have a 30% average return but with a much higher risk. This could mean it’s only one standard deviation away from the norm 30% of the time. 

Although these are matters for retail traders, they are examples of how risk comes into play when you’re trading and it highlights the need for robust risk management strategies.

Noting your own profit and loss (p/l) can help determine whether you’re using an appropriate amount of risk. Those that are new to trading may not fully understand the nuances of risk. 

As a broker, you have to not only explain this concept to clients but provide the necessary resources so they can manage their own risk.

Moreover, as a broker, you too have to manage risk. Is your book balanced? Do you have access to enough liquidity for your client base?

Are there resources in place if an unexpected news event were to occur and impact the financial markets?

What does your profit and loss sheet look like? These are details that you have to supervise and manage at all times. 

Taking on too much risk or, more specifically, allowing your clients to take on too much risk can be detrimental to your business.

There are no absolutes when it comes to trading, but IX Prime allows you to manage your systems and liquidity from a variety of angles. We’ll discuss the main risk management tools we offer later in this article.

However, everything should always come back to your p/l overview. It’s not the only metric you need to track, assess and manage. However, profit and loss data will, ultimately, tell you whether your risk management strategy is successful.

IX Prime makes it easy to track p/l across your entire book. When this is used in conjunction with our CFD trading tools, you can manage your clients and your book as a whole more effectively.

Lessons from the Past and the Current State Of Risk Management

The 2008 global financial crisis was the result of poor risk management. A lack of checks and balances, particularly in the sub-prime mortgage market, led to the building up of risk.

When customers weren’t able to repay their debts, systems and institutions started to collapse. The events of 2008 caused a shift in the mindset of financial institutions, major companies and lawmakers.

Risk management liquidity was no longer an afterthought. Indeed, it used to be the case that as long as a company’s or financial institution’s p/l overview was in the black, everything was fine.

We now understand this was not the case. Following the crash, several laws were passed. One of the most notable was the Dodd-Frank Wall Street Reform and Consumer Protection Act in the United States.

In the United Kingdom, new regulatory bodies came into force such as the Financial Conduct Authority.

The reform act brought in a variety of changes, including rules governing liquidity management, lending criteria and how banks were allowed to invest their money.

The overall aim was to minimise the risk factors in certain areas to prevent another crash. The legal changes also made financial institutions and traders more aware of the risk.

As such, aspects like margin and analytics became increasingly more important. It’s no longer possible to trade on huge margins because this can increase the risk of an investment. 

Moreover, market makers and brokers now have to offer better analytics and risk management tools. IX Prime allows you to meet these demands and remain compliant.

Indeed, there is more scrutiny on risk management than ever before, which is why you need the right trading tools to run an online brokerage. 

Tools to Manage Risk and Exposure

IX Prime offers a variety of risk management liquidity tools. From tracking profit and loss to revenue volatility, analytics and high impact news management, our platform offers 24hr risk assessment solutions. When used together, the following allows you to run a successful, legally compliant and potentially profitable brokerage service. 

IX Position Keeper

IX Prime allows users to connect to multiple servers to see all of their trading activity, thus making it possible to gain an overall picture of your book’s total risk exposure and position. Our position keeper also works with MT4 and MT5 so you can manage all instrument exposure centrally. In tandem, these features allow you to manage risk on a general and individual basis.

Live Pricing and Liquidity

IX Prime provides real-time price data on all instruments. This allows you to see the value and liquidity of your assets at any time.

P/L Overview

You can get an instant view of your floating and closed profit and loss with IX Prime. The platform also allows you to be more specific and get a p/l overview for each instrument in your book.

High Impact News Management

IX Prime has an inbuilt news event simulation tool. This tool generates high impact news scenarios and allows you to map them onto your book to understand how things could affect your profit and loss. Essentially, this tool allows you to prepare for common high impact news scenarios and develop risk management protocols to protect you and your clients.

Transparency and Data

You get 24-hour coverage of the financial markets as well as access to historical data and our economic calendar. This means you can see the past, present and future to develop the most effective risk management liquidity strategy.

Global and Personal Risk Manager

We can also offer a variety of risk management tools to work in unison with your own strategies. A global risk desk provides general advice for multiple markets. Additionally, we give you access to personal risk managers who provide specific advice based on your book and clients.

Fine Edge Analytics

The final way to develop a 24h risk assessment strategy using IX Prime is fine edge analytics. From flow performance reports and symbol analysis to volume data and lifecycle metrics, you can get detailed overviews of your assets. This makes it easier to monitor profit and loss, track revenue volatility and, ultimately, manage risk more effectively.

Using Risk Management to Maximise Profitability

All financial investments, from CFD trading to buying stocks, carry a certain amount of risk. True, without risk, there are no potential rewards. Therefore, it’s important to not only manage risk for the sake of your own business but the sake of your clients.

As an institutional body, having the right tools and systems in place can help you minimise risk which, in turn, can help you maximise profitability.

A company that understands risk management liquidity has a better chance of growing while remaining responsible and legally compliant. IX Prime gives you the tools to do this in a simple but effective way

Got a news tip? Let Us Know