Guest Editorial: Forex technology insider discusses risk management and black swans

Forex brokerage technology provider Leverate has been taking stock of what has transpired in the Forex industry over the last quarter.

The firm’s Trading Optimization Director Sami Mana has detailed his insight as to what Leverate got right, and why. He also provides brokers with strategies for coping with turbulent financial markets.

As the Trading Optimization Director for a major Forex technology solutions provider, I have a unique perspective on how liquidity can affect Forex brokerage profitability. On January 15th, when I saw the abrupt change in the Franc, I understood immediately that the SNB decision to remove the EUR/CHF floor was causing the price fall. However, I wasn’t unduly worried, as our company had been readying for this possibility over the past several months, thanks to clues we felt signaled an upcoming policy change.

Some of our brokers contacted me for assistance in navigating the challenges that can result from black swan events. I felt this represented a perfect opportunity to give some guidance, based on my own experience during my time with Leverate, both as head of the Customer Support team working directly with brokers for more than three years, as well as my current position overseeing trade placement. I’d like to share Leverate’s methods for containing fallout when unexpected circumstances arise, as well as some advice that Forex brokers can use to become better prepared.

Leverate worked hard before, during, and after this urgent situation to help protect our brokers. My team made sure to contain our exposure beforehand by parceling out liquidity holdings to multiple top-tier providers instead of placing all of our eggs in a single basket. We spread our trades carefully to avoid any disproportionately large exposure on the Franc. Afterwards, we assisted our brokers in finding liquidity, so we searched for LPs who could work with our brokers quickly, with the lowest overhead.

And now we are contacting clients proactively, speaking with our brokers about updating their risk management approaches.

We knew almost immediately that we had successfully responded to any potentially problematic repercussions in the short term, as we were able to maintain full operations continuously without major changes. We stayed alert, as it soon came to light that some brokers and liquidity providers survived the initial devaluation crisis, only to be brought low by the realities of the new financial landscape in today’s post-January Forex industry. Terms for liquidity providers have become much stricter, and the advantages of maintaining good vendor relationships and establishing bargaining power could not be clearer.

Therefore, we were pleased that our position over the course of the next several weeks continued to be good. Our strategy remains that of watching the markets closely for any signs of unanticipated fluctuations, so that we are always able to respond instantly once action is called for.

Forex brokers looking for safer options should strongly consider straight-through processing (STP) as part of an all-inclusive system for simplified Forex brokerage risk management. But a thorough directional analysis of ongoing trades, a constant evaluation of both your brokerage’s exposure and the market’s overall exposure, and successful management are also necessary. If I had to pick a single area of focus, though, I would emphasize taking the time to hire risk management specialists who are fully versed in Forex trading.

Your senior risk management analyst should be a veteran charged with creation, oversight, and management of a unified approach, who heads a knowledgeable team available 24 hours per day. Anything less, and you face being caught short at a critical moment.

I spend a lot of time with brokers stressing the need to take initiative. While in an industry like Forex, it is impossible to be a fortune teller, predicting every change in market direction, preparation for all possible outcomes can play a key factor in determine how a specific currency movement results in profits or losses, and also to what degree your brokerage will be affected. This is why I recommend scouting out multiple options in advance for likely contingencies, and creating a guide so that whoever is available at the time of an unanticipated market condition can immediately begin making the crucial decisions that lay the foundation for the health of your brokerage for weeks to come.

Running a Forex brokerage requires a large investment, both in terms of actual capital and in terms of time. While consistently doing all of the necessary preparation and research can seem insurmountable, it is definitely an achievable goal. Diversification, proactive risk management strategies, and proper allocation of job responsibilities will all lead to building a more successful Forex business.

This is a Guest Editorial, written and contributed by Sami Mana, Trading Optimization Director, Leverate.

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Guest Editorial: Forex technology insider discusses risk management and black swans


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