It was an ordinary Friday morning, on October 7, when US traders had already gone home, while Asian investors were just heading to their trading desks, when all the hell suddenly broke loose. The British pound lost over 800 points in a matter of minutes and then U-turned and recovered nearly half of the losses. We won’t go into the roots of this extraordinary event. Actually, traders that lost their deposits and brokers overwhelmed with clients’ complains, do not care a dime about the reasons for the crash, be it evil tricks of algo-traders or just someone’s mistake. Let’s have a look, how forex-broker startups can protect themselves from the consequences of force majeure in the market.
When markets are all nice and quiet, all brokers are equal, but once investors strike the panic button, those who were able to foresee the risks at the stage of the business development, prove to be the winners.
Does fortune really favors the brave?
Brokers with B-Book model are in the most risky position as they act the liquidity providers for their clients. First, they will have to pay out-of-the-pocket to those lucky traders that took the right position. If there are a decent number of such fortunate guys, the broker may find themself on the verge of bankruptcy. Second, other less lucky clients are likely to bombard them with claims and lawsuits, which the broker is bound to lose due to conflict of interest inherent in this business model.
A B-Book model is good for a quiet and orderly market, but it is not suited to the steep movements. Brokers that choose this scheme should be well aware of the risks and know how to properly manage them.
Tell me, who is your liquidity provider…
Brokers with A-Book model transfer the clients’ orders to the interbak market, thus they are better protected in case of sharp volatility spike: their profits and losses are not related to their traders’ success. In theory, they are out of risk regardless of the market movements.
Nevertheless, in practice, to withstand the extreme market conditions the broker shall provide the clients with stable access to deep liquidity. Otherwise they are doomed to be buried under heaps of claims from angry traders who could not execute the order due to a lack of buyers / sellers for a few vital minutes.
That’s why a novice broker needs to choose the liquidity providers with utmost care. Aggregated liquidity from several reliable providers such as LMAX, Morgan Stanley, Swissquote Bank, JP Morgan might be considered as the best solution.
In this case, the broker can offer the clients fast and quality order execution at the best price and ensure uninterrupted operation during periods of high market volatility.
Want to make your business crisis-proof? Just get in touch with us. B2Broker specialist will help you choose the business model that suits you best and offer a reliable aggregated liquidity solution that will easily pass any volatility test.