Proper risk management is vital for a retail brokerage.
In an industry of uncertainty, one must take all steps required to eliminate unnecessary variables. Most of the hedging strategies are based on either “trading room hedging” or “per-trader hedging”. The former keeps the trading room at a relatively high level of both risk and profit, and is sufficient for handling most traders. The latter reduces risk and profit and is recommended for handling specific traders.
“Trading room hedging”
This is the most common hedging method. The dealers hedge some or all of the exposure when it reaches a predefined level. The main problem of this method is that if traders open or close positions during spikes, you will be actually hedging their trades and bear a loss for that. For instance: if a trader buys EUR/USD during a spike at 1.5000/03 while the true price should have been 1.5010/13, the trader will most likely gain a profit of 7 pips at the end of the spike (most spikes last a few seconds). If your dealer hedges the entire trading room later, at the true market price (by buying EUR/USD for about 1.5011/12, depending on your hedging spread), the losses for the trade above are not recovered in any way, since they occurred almost immediately after the trade has been opened. Also, it is impractical to realize which trades are those that inflict losses, since we are discussing some trades of many. Therefore, the room’s bottom line may show revenue, but it will be much lower than it should be. Another significant disadvantage of this hedging method is that it requires constant human monitoring and management, which are always susceptible to fatal errors.
When completely hedging a certain trader in off-market prices, the trades may get rejected by your liquidity provider (you may choose to reject the trade for your client or approve it and bear the loss). If it doesn’t get rejected, then your liquidity provider may adjust that trade at a later stage, resulting in losses for your trading room, or requiring you to adjust past positions for your trader (which obviously leads to a complete dissatisfaction).
Leverate is here to help you manage your risk with more certainty. Risk managers are now able to do what they are supposed to do: manage the risk of your trading room based on market movement and exposure, and not on hidden losses. By using Leverate’s Real-Time Feed Solution you take a giant step towards operating in an environment where statistics play in your favor, and generate immediate profits.